Lululemon Athletica Inc (NASDAQ:LULU) has gone a long way since its July 2007 IPO. Investors brave or lucky enough to have bought after its 93% collapse during the 2008-2009 Financial crisis and stayed the course have made a real fortune. in September 2020, LULU stock was just pennies away from the $400 mark.
Although it dropped by a third over the following six months, Lululemon ‘s valuation is rising again with the shares hovering near $343. Can a new all-time high be expected? Is another major decline lurking around the corner? These are the questions we hope to answer with the help of the Elliott Wave chart below.
The weekly chart of Lululemon reveals the structure of its entire uptrend since that March 2009 bottom. It can easily be seen as an incomplete five-wave impulse. Waves I through IV are already in place and two smaller degrees of the trend are visible within wave III. Last year’s coronavirus selloff fits in the position of wave (4) of III.
Lululemon ‘s Uptrend Is In Its Final Stage
The most recent 32.5% drop must be wave IV. It is a simple a-b-c zigzag, while the corresponding wave II was an expanding flat correction. This is a good real-life example of the guideline of alternation between the two corrective waves of an impulse.
If this count is correct, we can expect a new record high in wave V. Targets near $450 look plausible, but investors must not extrapolate the uptrend into the far future. According to the theory, every impulse is followed by a three-wave correction in the opposite direction.
Just like wave (4) followed the impulse in wave (3) and wave IV followed the impulse in wave III, a retracement should occur once wave V is over. Given Lululemon ‘s already stretched valuation, it can be a sizeable one. Elliott Wave aside, a ~50% correction down to roughly $225 makes perfect sense for a company currently trading at a forward P/E of 53.