Last week we looked at the retail sector, using Costco to represent the strength in major discount chains, No. 38 of IBD's 197 industry groups. The apparel group in retail, by contrast, hasn't been as great. It comes in at No. 142. So what made LULU stock stick out for swing trading?
Look At Former Leaders For Shorting
Before looking at Lululemon Athletica as a buy for swing trading, first it was considered as a short. LULU stock has had long stretches of outperformance, making it a model book stock.
But after topping in November, the whole group struggled. LULU stock was down more than 30% by the end of January.
When former leaders establish downtrends, rallies can be used as short opportunities. A downside reversal with resistance at the 21-day moving average acted as our signal to put LULU stock on SwingTrader as a short (1).
Unfortunately, our timing was a little early. We covered the position on a strong move above its 21-day line (2). Fast forward a few days and it started to move down quickly before hitting its March 15 lows (3). It was the right idea at the wrong time.
Shifting To The Long Side For LULU Stock
When the market bottomed in mid-March, the subsequent rally was fueled by some of the most beaten-down stocks. LULU stock was among them.
This follow-through day is in trouble. This week's podcast covers early signs of a follow-through day failure.
LULU stock saw a 10% jump after a positive reaction to its earnings report. (4). That marked nearly a 40% move from its bottom. As powerful as that is, we don't enter stocks trading at their lows. The risk of the downtrend continuing is too great and bottoms are best picked in hindsight.
We would rather wait for signs of strength. A 40% move certainly fits the bill, but there were a few more tests to pass. Could LULU stock hold the majority of its gains? Could it get back above its 200-day line?
A Quick Swing Trade
We put LULU stock on SwingTrader as a buy idea after passing both those tests (5). The low of the entry day seemed like a reasonable stop but had a larger risk than desired, especially in this market environment. Instead of skipping the trade, we simply reduced our position size.
Although LULU stock didn't immediately follow-up on that power, the pullback over a couple of days remained inside our entry day (6). When it jumped strongly after support at its 200-day line, we took a third of our reduced position in LULU stock off to lock in some profits (7).
The next day's action was an expectation breaker (8). A large spread between the high and low of LULU stock on an outside day with a close near the lows. That was enough to signal a character change. As ugly as the day was, our earlier profit taking allowed us to exit flat on the trade.
Not losing money is a better strategy than trying to make money when the market is unfavorable.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
