The stock price of troubled department store JCPenney (JCP) has been in a precipitous decline since February 2012, and while JCP stock has bounced sharply during the past two weeks, it doesn’t look very appetizing just yet — in either time frame.
The news around JCP is often fast and furious thanks to the involvement of many hedge funds. The most recent comments — of the positive variety in this case — came Oct. 29 from Avenue Capital Group’s Marc Lasry, who expressed his optimism on the company by pointing to the $2 billion cash pile vs. the $500 million in interest payments it is scheduled to pay in coming years. He also said JCPenney should start making money again next year. Since Lasry’s comments, JCP stock is trading up handsomely, which now means he will be followed closely for any further spewings on the stock.
This involvement by big-name investors and analysts who are not shy to voice their opinions makes JCP a tricky stock to trade.
The multiyear chart of JCP shows how it fell out of a huge wedge formation in May 2012, retested the breakdown point, then proceeded to fall sharply lower into the recent lows in mid-October.
Given the sharp spiral lower this year, for me to get bullish on JCPenney stock I would at least need to see some sort of positive divergence between price and the momentum oscillators. In other words, the sharp decline would need to come on somewhat decelerating momentum. But this still is missing, making me think the downside isn’t entirely over for JCP, and that a better base still needs to build before JCPenney stock becomes a better long-side candidate.
To be clear, the lack of divergence between momentum and price does not mean that JCP has to fall much lower; it simply means that the stock likely has to consolidate better.
The stock already has an attractive first attraction level where it could migrate toward on the upside, however. The level, near the $12 mark, is made up of its August 2012 downtrend and a previous support level (now resistance), where the stock fell below in September.
With this in place, I am now watching for JCP stock to do some backing and filling, build a better base and form a tighter pattern in coming weeks to see if it once again can become a better stock to trade from the long side.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.