Relative Strength Index, Stochastic, and MACD, with Lululemon Exhibits

Those who like to sell call or put options do so by trading around a core position in their portfolio. Usually, these stocks, like Lululemon (LULU), are long-term, uptrend, growth stocks. By using short-term indicators such as the relative strength index (RSI), stochastic, and moving average convergence/divergence (MACD), investors can make some additional money by selling (writing) calls or puts. Using these technical signals, an investor can determine when there is low risk in selling the calls and puts. That is, you expect that these options will never be exercised, and the money received for writing the options is banked as additional income and adds to the portfolio performance. Portfolio managers and individual investors using this option-writing strategy must know these technical signals perfectly.

Growth stocks in the retail industry seem to follow a familiar pattern. They find a very successful niche and exploit it by opening more and more stores to provide impressive growth that Wall Street loves. This is the case with Lululemon, and it has enough history to provide a little case study for technical analysis.

First, you want to look at the longer term (Exhibit 7.1) to see if the technical signals are similar to the ones you looked at for Apple and Google in Chapters 1 and 2.

EXHIBIT 7.1 LULU, June 8, 2012, 5-Year


Yes, the 200-day trend turns up in the middle of 2009. ...

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