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With Growing Sales in China, is L’Oreal Primed for a Resurgence or Poised for a Correction?

Booming Chinese demand for luxury cosmetic goods and growth in e-commerce sales have given investors a boost in optimism for the future of L’Oreal. After exceeding expectations for third-quarter revenue growth in a statement released October 21st, shares in the stock gapped up around 6%. To date, the gains have held. The stock is at an important crossroads, and price action in the coming weeks is likely to be very telling about the direction of trend for the foreseeable future.

At present, L’Oreal is in a sustained uptrend, as characterised by consecutive higher peaks and troughs in price. See figure 1. However, the double bottom lower low which formed earlier this month is cause for increase caution among bulls. It’s important to note that despite the lower low, the uptrend is still technically intact. There is no confirmation of the beginning of a new downtrend yet, so any bias based on trend should remain bullish, for now. Nonetheless, let’s look at some of the key price levels to this trend, so as to be certain of when a transition into a downtrend would be confirmed, should it happen.

Figure 1

The key support level to be watching for now is the price of the prior lower low, around €351. If the current upswing were to reverse quickly and go on to break below that €351 support, a new downtrend would be officially confirmed. A break below €351 would very likely be followed by a further, more substantial downtrend in price. On the other hand, if the shares rally from here and manage to exceed prior resistance around €407, a new higher high would be confirmed, reinstating the current uptrend and invalidating any concerns about the lower low. That is, a break above €407 should lead to a strong continuation of the present uptrend. Thus, L’Oreal shares are at an important and decisive point. Whether price next breaks above resistance or below support may have a significant impact on the direction of trend for weeks, even months to follow.

The RSI will probably give an important clue about which scenario is more probable soon. Throughout the uptrend, the oscillator has consistently been becoming overbought around the 74-83 range, and oversold around the 35-45 range. These ranges are roughly typical of all uptrends. If a new downtrend is to be established, new overbought and oversold ranges will come into effect, which will be lower than the uptrend ranges. Importantly, the RSI did already break below the general oversold range earlier in the month by falling as low as 27. This may be a signal that the oscillator is no longer behaving under the conditions of the previous uptrend, and thus that a new trend is imminent. What should we be looking for now? Well, if the RSI becomes overbought below the current overbought range (below 74), and goes on to break below the 35-45 range again, consider that a very strong signal that a new downtrend is in effect and further declines are likely to follow. Alternatively, if the RSI advances for a retest of the 74-83 overbought range, that should be considered a strong signal that the present uptrend is indeed intact, and a continuation higher is likely to follow.

The current uptrend has seen L’Oreal shares more than double in value from the March 2020 lows to the August 2021 peak. The nature of the trend going forwards, be it a reversal into a downtrend or a continuation of the uptrend, is likely to sustain for a considerable period of time, and could see a dramatic rise or fall in price. Much will be revealed in the coming days and weeks when we see how price and oscillators interact with these key levels. Watch closely.

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