We’ve got nothing much to add to the facts repeatedly offered up to anyone with an interest in Lululemon Athletica Inc. (NASDAQ:LULU) over this past week — namely, that LULU reported a solid earnings/revenue beat on Tuesday for its most recent quarter, along with an appropriately favorable earnings outlook. But those facts are an input (actually, one of many) to our unequivocally bullish view on the shares — to the extent that we are moved to recommend a LULU call option trade.
The accompanying daily chart of LULU since mid-2017 can, at first glance, be seen as depicting two separate periods of sideways price action (the first of about six months’ duration, the second of about three months’) — interrupted in each case by a gap-initiated rally (with each such rally, not coincidentally, triggered by an earnings release).
But missing from this factually accurate description are some indications that beneath this “stairstep” price action lies a legitimate trend to the upside. One such indication is in the form of LULU’s rising 80-day moving average (bright green line on accompanying chart), at which the share price has been supported at several key junctures after pullbacks.
Another is best stated verbally: Over the period from Nov. 7 to date (comprising nearly five months), LULU has experienced just two daily closes below its 50-day moving average. As has often been stated (and illustrated) at Investors.com (publishers of Investor’s Business Daily), stocks that regularly find support at their 10-week (50-day) moving averages are likely to be under accumulation by deep-pocketed institutional buyers.
Further reinforcing the bullish technical picture for LULU is the action in its 14-day Average Directional Index (ADX). The ADX can be said to be a measure of the “trendingness” of a security — its tendency to move directionally, independent of whether higher or lower. Just ahead of the December 2017 gap-based rally on earnings — at a point marked on the chart as “ADX TROUGH A” — the 14-day ADX checked in at an extreme low of just above 10, as a reflection of the stunted directional price movement in LULU over the prior six months.
And a similar phenomenon occurred at “ADX TROUGH B” in the days just ahead of the March 27 report — only this time, the 14-day ADX registered a reading of 8.36 (a multi-year low). So it was not surprising that a gap-based breakout occurred after this release — with the direction of that move biased strongly in favor of the bullish underlying price trend, as reflected in LULU’s price action relative to its key moving averages.
The holding period we’ve defined for our recommended LULU call corresponds to the period between the company’s March and June earnings reports. Over the corresponding period from December to March, the rally in LULU shares was in the order of 20-25% above the upper end of the pre-earnings trading range. And a similar rally over the March-June period would place the shares in the vicinity of the $100 mark.
But if our directional analysis is correct, we have reason to believe the magnitude of the ultimate gain could be greater — perhaps to $105 or even a bit beyond. We (as well as the investors who, in aggregate, determine share price levels) are always attracted to super-round numbers. And so we’d note here that — based on LULU’s price level over the course of the March-June period in 2017 — a 100% year-over-year gain would be approximated by LULU reaching the $105 mark over the current period.
Finally, the implied volatilities underlying LULU options (which ultimately determine the cost of an at-the-money option) are at very attractive levels relative to some other fellow retailers. Despite comparable historical volatility with names like Urban Outfitters (URBN), LULU options currently trade at an implied volatility discount of about 25% relative to the options for URBN.
Subscribers to Schaeffer’s Weekend Player options recommendation service received this LULU commentary on Sunday, April 1, along with a detailed options trade recommendation — including complete entry and exit parameters — straight from Bernie’s trading desk. Learn more about why Weekend Player is one of our most popular options trading services.
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