Shares of Lululemon Athletica Inc. (NASDAQ:LULU) continued to trade lower Monday, extending a slide that began on June 5. But the selloff could be nearing exhaustion—and a potential rebound may be on the horizon.
Lululemon is oversold and at support. This is why we have made it our Stock of the Day. Stocks that are oversold and at support tend to rally.
Stocks trend lower because there isn't enough demand. There are more shares for sale than there are to be bought, forcing the traders who wish to sell to push the price lower if they want their orders executed.
When a stock reaches a support level, the dynamic changes. There is more than enough demand to absorb all of the supply. Stocks stop going lower when they reach support levels.
Sometimes, when a stock drops to a level that was previously support, it finds support again. The chart shows this happened with Lululemon’s $227 level.
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Some people regretted selling around $227 in August when the price rallied afterward. Many decided to buy their shares back if they could eventually do so at the same price they sold them for.
When the stock dropped back to this level, these remorseful sellers placed buy orders. This created support again at around the same price.
The stock is also oversold.
The bottom part of the chart consists of two momentum indicators. The first is the Relative Strength Index. When the blue line is below the horizontal red line, it indicates oversold conditions, which is now the case.
The second indicator is called the Fisher Transform. This indicator is not very popular, but it is very effective and can be found on BZ Pro.
When the red and the black lines are below the blue horizontal line, it means the stock is oversold. If the red line crosses above the black line, there is a good chance a reversal is occurring.
It hasn't happened yet, but buyers may enter the market anticipating a rally if it does. Their buying could force the shares into a new uptrend.
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