The first time we wrote about Lululemon in late-April, 2021, Elliott Wave analysis suggested to expect a new all-time high between $450 and $500 a share, followed by a major bearish reversal. It worked like a charm as the stock reached $485 in November and then plunged below $350 by mid-January, 2022.
When a quality company like Lululemon gets significantly devalued in such a short order, investors often rush to buy the dip. A second look at the stock’s weekly price chart below, however, convinced us the time to jump in hasn’t arrived yet.
We shared this chart with our readers on January 11th, 2022. In addition to the previously-discussed I-II-III-IV-V impulse pattern, it revealed that the drop from $485 was a single wave. A complete correction consists of not one, but three waves, usually labeled A-B-C. Hence, instead of joining the bulls, we thought “wave B can lift Lululemon to the resistance near $400, before the bears return to drag it below $300 in wave C.” We added that “a drop to sub-$250 won’t be a huge surprise, either.“
An Elliott Wave Cycle 13 Years in the Making in Lululemon Stock
Note that our negative expectations had nothing to do with the company’s business fundamentals. In fact, Lululemon ‘s revenue grew a phenomenal 42% last year and is forecast to add another 21% this year. With over a billion dollars in free cash flow per year, the company has never been in a better shape. Yet, Elliott Wave analysis suggested the stock is likely to decline anyway. Four months later now, we know that is exactly what happened.
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Wave B lifted the price to $411 in April, only giving the bulls false hopes before wave C hammered the stock down to $252 earlier this week. The corrective phase of Lululemon ‘s Elliott Wave cycle can already be labeled as a simple A-B-C zigzag. However, it makes sense to expect more weakness towards the 61.8% Fibonacci support level near $190 before the uptrend can resume.
Given its impressive growth rate, healthy profitability and no debt, Lululemon has a good chance of making it into The EWM Interactive Stock Portfolio if/when it drops below $200 a share. We remain on the sidelines until then.
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