J.C. Penney Company Inc. (JCP) reports earnings on Friday, Nov. 11, with weak retail sector sentiment setting a low bar for a positive post-news reaction, despite the stock’s long-term downtrend. The release comes just one day after stronger rival Nordstrom Inc. (JWN) releases its quarterly confessional, with that reaction likely to set the tone for JCP traders.
The stock took a dramatic plunge between 2012 and 2014, weighed down by a failure to transition into the digital age or reposition sales for a younger generation. A painful stint by former CEO Ron Johnson added to downside pressure, with the Apple Inc. (AAPL) store alumni displaying a ten thumbs executive approach that raised alarms about a potential bankruptcy.
Management changes, stock offerings, and aggressive debt management have brought the mall anchor back from the brink, but it’s still failing to attract deep-pocketed buying interest because funds and institutions have already been burned by broken boardroom promises. As a result, the stock continues to plod along in single digits, much closer to multi-year lows than multi-year highs, while exposed to a death spiral that could end the company’s 114-year success story.
JCP Long-term Chart (1993-2016)
The stock bottomed out at a 3-year low in 1990 and took off in a powerful uptrend that topped out at $78.75 in 1998. It then plunged in an Elliott 5-wave decline that ended at a multi-decade low in single digits at the end of 2000. It built a higher low through the rest of the bear market and took off in a strong recovery, returning to the 1998 high in the fourth quarter of 2006.
A breakout into 2007 failed to gain stream, triggering sideways action followed by a failure swing that signaled a major top. It fell throughout 2008 at the same trajectory as the 1998 to 2001 downtrend, finally printing a tradable bottom at the 2002 swing low. A bounce into the new decade failed to clear the .386 Fibonacci selloff retracement level, reversing in the low 40s in 2012, ahead of a dramatic breakdown through the 2002 and 2009 lows in the mid-teens.
Intense selling pressure continued into the first quarter of 2014, breaking through the deep December 2000 low before bottoming out in February at $5.18. The stock has crisscrossed the millennial low repeatedly in the last two-and-a-half years while failing multiple attempts to hold double-digit pricing. The latest rally wave ended at 11.30 in August 2015, yielding a steep decline that’s now relinquished more than 25% of its value.
JCP Short-term Chart (2014 – 2016)
Price action since the middle of 2014 looks more like a heart EKG than a price chart, with choppy sideways swings along a central axis created by the 16-year-old low. Neither bulls nor bearish have profited from this chaotic behavior, which will eventually end with a sizable recovery wave or a death spiral that leads to bankruptcy. In the meantime, this high-risk environment looks best suited to day trading, while everyone else keeps their powder dry and look for opportunities elsewhere.
On balance Volume (OBV) sets an ominous tone for remaining bulls in coming months, falling off a cliff in 2013, bouncing into the middle of 2014 and easing into a slow motion decline that’s now testing a 3-year low (red line). At the same time, the price is trading more than three points above that level, setting off a bearish divergence that predicts an eventual breakdown.
The Bottom Line
J.C. Penney’s weekly Stochastics oscillator has dropped into an extremely oversold reading after an August reversal generated a sizeable decline into single digits. This positioning raises odds for a buy the news reaction after this week’s quarterly earnings despite broadly bearish technicals that predict an eventual breakdown.
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