Lululemon Athletica: Making Lemonades out of LULU Lemons

It has been a great year of trading stock options and I am convinced that a view at the performance of your options trading portfolio this year will keep you smiling for a sense of accomplished profitability. Indeed, we have had many profitable trades that had us smiling to the banks this year; nonetheless, we cannot wish away the fact that we had the occasional unprofitable trade.

As we enter the last trading week of 2014, we will examine one or two of those unprofitable trades and see how we could turn their lemons into lemonade as we sign out of 2014 in grand style. Hence, we will start this week with an exploration of possibilities in Lululemon Athletica Inc. (NASDAQ:LULU).

We initiated coverage on LULU options on March 27 in a post titled “An Element of Surprise in Yoga”. In that piece, I gave Lululemon a $60 price target in September only to see the shares of Lululemon fall to around $45 by September. Hence, there’s no sugarcoating the fact that LULU was a losing trade.

New LULU Coverage

Lululemon with its market capitalization of $7.72B is a designer and retailer of technical athletic apparel operating primarily in North America and Australia. The Company’s yoga-inspired apparel is marketed under the lululemon athletica brand name. The Company offers a range of performance apparel and accessories for women, men and female youth. Its apparel assortment, including items, such as fitness pants, shorts, tops and jackets, is designed for healthy lifestyle activities such as yoga, running and general fitness.

I am convinced that Lululemon will turn its lemons into lemonade based on the potential positive patterning that I can see in its stock chart. The chart below (with my annotations) shows how the shares of Lululemon have traded within the last two years.

A Round Bottom

From the chart above, you will see the shares of Lululemon displaying a round bottom pattern from April through December 2014. A rounding bottom pattern is a reversal pattern in which a stock will rise back to the original price point of a sell-off in a rolling upward movement that indicates a potential rounding of the lowest point for the stock.

Where is LULU Headed?

LULU Chart

From the chart above, you will see that shares of Lululemon suffered a sell-off from a $55 resistance (Red line) point and the stock has moved up back to the $55 resistance point over the course of the last 7 months (Green Curve). A bottom pattern chart by itself does not say much about where the stock is heading; yet, a confirmation or rebuttal of the pattern could offer valuable insight about where a stock is potentially headed.

The confirmation of the rounding bottom pattern would see shares of Lululemon breaking out above the $55 resistance point and we can technically say that Lululemon has a breakout above $55 when it closes above that level in three successive sessions. On the contrary, the rounding bottom pattern will be rebuffed if the Lululemon breaks below the $55 resistance point again.

If Lululemon confirms the rounding bottom pattern, we can expect to see the stock soaring to new 52-week highs above $60. In fact, we can expect the bullish streak to carry the stock towards its 2-year highs around $80. On the contrary, a breakdown below the resistance point could see Lululemon consolidating some more under $50 or even falling to the $40 range.

How to Trade LULU Options

If you are feeling bullish about Lululemon, you can buy call options above the $55 resistance point with a stop/limit loss set below the $55 point. Hence, I recommend playing LULU call options with LULU Mar 2015 55.000 call (LULU150320C00055000) at an asking price of $4.25 to set a $60 price target on Lululemon; nonetheless, you should set a stop loss at $3.00.

— Daily Option Alerts

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