Once in a blue moon I come across a stock that puts in such a clean setup that I become completely enamored by its look. I trade bull and bear flags and waiting for an A setup requires a lot more thumb twiddling than I like to admit. But recently I came across $LULU, Lululemon.
Just to be clear, I do NOT believe $LULU is a guaranteed winner, nor am I advising anyone to buy this stock. What caught my attention is this stock’s past, not its future.
From February 1st until now, the SPY has been on a nail biting roller coaster ride. You could practically hear the thralls of the crowd emanating from the charts. Now take a look at $LULU’s daily chart during that exact same time period. Horizontal, flat, and dare I say, boring.
But I draw attention to $LULU’s recent past to address a concept often overlooked by amateur investors. Relative Strength. If you were (for some odd reason) limited to only being able to view $LULU’s price chart, you would never have known that the market experienced a pullback.
So what is relative strength?
They say a rising tide lifts all boats. But when the tide falls, certain boats can remain afloat. It’s these stocks that refuse to sink with the rest of the market. It’s these stocks that stand up in the face of adversity. It’s these stocks that demonstrate relative strength. If the market were to recover and rise again, it’s usually these stocks that are the first to go.
On March 28th, $LULU beat estimated earnings and provided a strong outlook, gapping the stock higher by 6.78% on premarket volume of 46,291 shares. By the end of the day the stock reached new high territory. The day’s trading volume was also relatively high, with 10.7 million shares traded compared to its average volume of 1.9 million. Despite closing with a large wick, bulls recaptured the lost price points by soaking up all of the supply from the bears on the following day.
These two candles constitutes $LULU’s flag pole, demonstrating the initial bullish momentum. The days that followed showed signs of sideways rest, aka consolidation. With this flag portion tightening, a break over this level could indicate the start of new buyers and bears covering their shorts.
With that said, there’s no guarantee that this stock is going to rocket higher. In fact, there’s no guarantee that this stock isn’t going to come crashing down to $82. But whenever I notice relative strength followed by a clean price pattern, I’ll always believe that probability is in its favor.
(At the time this article was written, $LULU broke consolidation level and broke the previous high of $90.25.)