LULU rounds out a bottom

lululemon athletica inc., together with its subsidiaries, designs, manufactures, and distributes athletic apparel and accessories for women, men, and female youth. It operates in three segments: Corporate-Owned Stores, Direct To Consumer, and Other. The company’s line of apparel include fitness pants, shorts, tops, and jackets for healthy lifestyle activities, such as yoga, running, and general fitness. Its fitness-related accessories comprise bags, socks, underwear, yoga mats, and water bottles. The company sells its products through a chain of corporate-owned and operated retail stores; direct to consumer through e-commerce Websites; and a network of wholesale channel, such as premium yoga studios, health clubs, and fitness centers.

Take a look at the 2-year chart of Lululemon (Nasdaq: LULU) below with my added notations:

A rounding bottom is a reversal pattern that is as simple as it sounds: After an extended sell-off, a stock “rolls upward” from the left to right thus forming a potential bottom that, once formed, looks somewhat like a broad “U”.

LULU appears to have formed a rounding bottom price pattern (blue) from April until last week. As with any price pattern, a confirmation of the pattern is needed. LULU would confirm its pattern by breaking the $55 resistance (red) that has been created by the rounding bottom pattern.

The Tale of the Tape: LULU seems to have formed a rounding bottom. A long trade could be made on a break above $55 with a stop loss set below that level.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

@cmtstockcoach