lululemon athletica is a classic example of a stock that moves from one box to another. Nicolas Darvas came up with his box theory in the 1950s and it served him well. Here's what LULU has done in three short months.• Traded between 28 and 37 from July 30 to September 18.
• Breakout on large volume, Sept. 19.
• Traded between 38 and 48 from Sept. 20 to Oct. 15.
• Breakout on large volume, Oct. 16. New high of 50.81.
In Darvas' world, anticipation of good and bad news did not exist until after the fact. He relied heavily on price action, i.e. investor/trader psychology reflected in the stock. Would he have sold LULU when it plunged from 48 to 41 in the past week? Hard to say. When he believed strongly in a stock, he let it bounce within its box.
I'm optimistic about LULU at this stage of its development, so I had no qualms about letting it ride. Good thing I did. Yesterday's raised guidance and today's participation at the Wachovia conference in New York have boosted the stock. It's a good time to be a retailer, with the 50-basis point Fed cut behind us and the holiday season just ahead.
LULU is trading at 49 plus this morning.
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