Lululemon Is on the Verge of a Breakout

 | Jun 30, 2017 | 1:00 PM EDT
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This commentary originally appeared on Real Money Pro on June 30. Click here to learn about this dynamic market information service for active traders.

Lululemon athletica (LULU) is one of the leaders in specialty athletic apparel. Recently, the stock has taken a beating as fears of competition, along with several missteps by the company, have taken their toll.

Now, after several months out of the spotlight, the stock is suddenly coming back into focus. Is this move in lululemon sustainable? Let's go to the chart.

LULU dropped sharply three months ago, creating a large gap. Since then, the stock has formed an inverted head-and-shoulders pattern (semicircles). This bullish pattern projects the stock to about $67 per share. However, LULU must first contend with its 200-day moving average (red), which acted as resistance yesterday.

Also bullish is the stock's MACD (moving average convergence divergence) indicator, which has been trending higher since early April. This phenomenon is known as bullish divergence, and it foreshadowed the breakout that is occurring now.

Source: TradeStation

Lululemon reached a three month high yesterday and is now well into the gapped area that occurred on March 29, after the company reported a slowdown in both in-store and online traffic. At that time, CEO Laurent Potdevin blamed the company's troubles on its selection and on the presentation of its merchandise. On a conference call, Potdevin took responsibility and told investors that "we know how to fix it."

Why is lululemon suddenly on the rise? It could be due to speculation of a private equity takeover. Similar rumors have surfaced from time to time, so this is nothing new.

On the other hand, perhaps the stock is gaining traction due to a shakeout among its competition. Lululemon, Under Armour UAA, and other brands have fallen sharply in part due to rising competition within the athleisure sector. However, many of the new brands, such as Kit & Ace and YogaSmoga, have failed to gain traction; the former is closing all of its U.S. stores, and the latter recently declared bankruptcy.

The assumption was that these new brands would cut into lululemon's market share, but the company's customers have demonstrated a high degree of loyalty. That loyalty is hard to come by, and could sustain the company as it works through its aforementioned issues.

There are risks here, to be sure. What if lululemon fails to execute once again? What if a deal to take the company private never materializes? What if customer loyalty wavers? What if the competition finally catches up?

Despite these risks, the chart shows that the wind is currently at LULU's back, so I'm staying long the stock.

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