One of our members is pretty familiar with LULU, being a customer and living in the same area where LULU was founded and originally produced their line. I particularly like ideas when you have direct experience with the company or the field they are in. I remember as a Dell customer, I had to return a couple of their computers, around the same time the local outlet they had opened closed and I remember thinking this is a company that I'd like to short if for no other reason then all the time and energy they cost me. A few months later in 2005, Dell fell hard losing nearly 50% over the next year.
When our member was talking about LULU and the fact the stores were empty and the quality of their product (which is high-end sports wear) had deteriorated badly, I kept thinking about the 2011 margin squeeze that continues today, but for a time it was very bad for manufacturers as commodities had run up, so the lower quality makes sense. In any case, they report March 8th so this could be in addition to a regular trade idea, a specific earnings play, but we'll have to check back in on the charts just before earnings. Here's what it looks like as of now.
This is LLU's relative strength vs their Sub-Industry group, this is not at all the same as Wilder's Relative Strength which compares the stock to itself, this is regular relative strength comparing the performance of LULU vs the sum of their competitors in the same group, clearly it is poor.
LULU is volatile as you can see by it tracking a 10-dy moving average, it also has a Beta of 2.5 which means on average it will move 2.5x the S&P-500. There's also a Wilder's Relative Strength divergence at the bottom.
Here are the local daily sell signals, we have a large one now, also I tried to highlight in yellow the Bollinger Bands narrowing, this is the most extreme pinching of volatility on this chart, which indicates there's a high likelihood for a strong directional move.
The Trend Channel, which self-adjusts to each stocks volatility and then adds a formula for the channel which is based on 2 standard deviations from the average volatility, so when the channel is broken (at the red trend line), it tells you something significant has changed. The ATR has decreased which is a direct result of the very small candles representing a loss of momentum (the red rectangle shows the area in which the price candle's daily range has become much smaller) and at the bottom, my custom indicator, "Close within the range" has made a new low after trending up, so the daily closes when smart money trades have been weak.
The hourly 3C chart shows strength in white and distribution at the red arrow, we've seen stocks reverse on a 15 min divergence so a 60 minute divergence is pretty serious.
There is usually a defining moment that most traders fail to recognize in which the stock's back (trend) is broken, it doesn't mean there will be an immediate decline as Wall Street is still setting up positions, but this area where LULU made a strong move to a new local high and then gave it all back on the same day on a 3C negative divergence looks to be that area in which its back was broken.
This is that day in yellow...A strong opening and very weak close and on volume, I wouldn't be surprised if longs from that day are still hanging in there trapped.
Here's the same day on a 15 min chart
And a 5 min chart, so there's good confirmation.
The two minute chart shows a recent head fake move.
I would prefer to see the trend channel broken before entering a short trade and use the channel as a stop. The other trade that may be worthwhile is the earnings trade, in that case we'll simply need to look at the charts just before earnings and if they are like they are now or worse, it's likely there's been a leak and LULU is being set up now for the move to come after earnings.
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