Saturday Rock Blog: Shine On You Crazy Diamond

Disclosure: I have no position in LULU but it looks pretty bullish.

A Chart a Day #13: Lululemon Breakout! (LULU)

Thoughts on LULU

Right now LULU Dec 60 calls are my largest position so naturally I am digging into the chart to figure out significant price points. Not coincidently, the fibonacci levels for the only two significant moves match up well with areas of congestion in the chart. I have the red fibonacci pullbacks shown for the entire move from IPO to peak and the less important blue fibonacci pullbacks for the most recent 50% move from $40.87 shown below. It looks to me like $48.44 is the most important price to watch and should act like resistance to upside but major support once we get above there. This price represents the 38.2% pullback for the entire LULU move from IPO to peak and the 61.8% pullback for the most recent move.


Well, we are currently below that level but fortunately LULU has a rising 50 dma at $42.91 and a trendline shown in blue just above. Those two levels should act as strong support for now and I'd be surprised to see LULU break $45 especially given the fundamentals but if it does I will likely hop out of these calls to buy some lower strike options at the 50 dma. If LULU breaks $40 I'm gone and won't look back for a while.

So why did LULU crack Thursday and Friday so bad? Well I have a few thoughts on this, first of all Cramer the clown came out Friday morning and said sell LULU because it could tank like CROX. Obviously, he just wants to buy back LULU cheaper after he sold early last week. Secondly, there was an extremely bullish push into the close on Wednesday and LULU moved almost 10% in about an hour on huge volume. My guess is that many of those buyers were technical traders that saw the fib bounce and the extreme uptrend that LULU is in. So I bet their stops were hit Friday morning when LULU cratered in the first 15 min. Finally, the entire market got slammed and retail was second only to the mortgage insurers for most pathetic stocks of the week.

I personally couldn't be more bullish on the fundamentals, especially given the strength in the Canadian dollar. Recall the press release a few weeks ago where LULU raised their estimates for this quarter, in part, because of the Canadian dollar's strength (earnings in Canada are now worth more US dollars). Well heres a look at the Canadian dollar over the last few months:


Maybe they should have raised guidance again? As far as I'm concerned buying LULU is a great play on the exploding Canadian dollar, what do you think indigo (currency trading Canuck) and betweenthebars (biggest LULU fan ever)?

Prior posts on LULU here.

Disclosure: I own LULU Dec 60c

Musical Costume

The fed lowered interest rates by .25% today, as expected, adding further to upside inflationary pressure on commodities and other currencies. The stock market's reaction has thusfar been confused with some wild action in both directions. Clearly the leaders (ICE, LULU) popped big and the weakest stocks fell hard (ABK, MBI).

On a Halloween related note, here is something phish used to do on their 10/31 shows called a musical costume. They would play another band's entire album all the way through or in some cases just a few songs. The show that this clip is from was performed in Las Vegas on October 31st, 2005 where they played the entire White Album (The Beatles).

This one goes out to Ben Bernanke...

LULU Under $50

Looks great for an entry next week but the options aren't cheap. I remember buying the Dec. 55 calls for 40% implied volatility less than a month ago but now they are twice as expensive at 80%. Probably the best way to play LULU here is to short the 50 puts or just go long the stock. However, being the option addict that I am I'll probably just buy some November or December 60 or 65 calls (I sold my previous position). Check out the daily chart above and the implied volatility below since LULU's IPO a few months ago.


Be aware that this is a volatile stock partially due to the growing bear camp on this stock. Technically it could fall as far as its rising 50 dma at $41.3 before ending the current uptrend but there are multiple support levels between here and there. In my opinion the best spot to load up on LULU would be around $47.50 but word is spreading about this stock and people want in so it might not get there. I think any price under $50 is worth nibbling, but really hope I'm not being too greedy here. As always YOU are responsible for your own investment decisions, I'm just telling you what I like.