J C Penney Company Inc (NYSE:JCP) has seen a massive rally from its January lows that at one point last week measured to nearly a doubler. Like many rallies, this latest move by JCP stock was news-driven and resulted in a snowball effect that kicked off a series of positive headlines (arguably also a squeeze of short sellers).
However, the move looks completely overdone and begs for some mean-reversion lower.
Much of this rally came on the back of JCPenney reporting upbeat sales for the fourth quarter on Jan. 26, which apparently surprised many market participants. This was followed by other positive headlines, including some upgrades and the addition of new board members.
All in all, fundamental believers in a turnaround story of JCPenney (and speculators in miracles) were rewarded in recent weeks, while anyone with a bearish view has been decimated. However, while further upside in JCP stock is entirely possible, there’s plenty of cause for pause right now.
JCP Stock Charts
On the multiyear weekly chart, we see that JCP in 2007 was trading well into the $80s but by 2015 was reduced to a $5 stock. Before the recent blast-off, the $5-$6 area was once again re-tested in February, which by some measures could be looked at as a double-bottom or marginal higher low bottom.
Note that the rally of late has also for the first time broken the major longer-term red-dotted diagonal line of resistance, giving those betting on a sustainable recovery in the troubled retailer something to hang a hat on to.
At the same time, JCPenney is nearing its major horizontal line of resistance (former support) around the $13-$14 range, where I would expect the stock to at least tread sideways for some time.
On the daily chart, we see that early last week, JCP stock not only got too far extended above its medium-term moving averages, but also above its nearer-term (blue 8- and yellow 21-day) moving averages. Then last Wednesday, JCP stock reversed gears and left a bearish engulfing day behind on the daily chart, which was succeeded on Friday by follow-through selling that a) confirmed Wednesday’s bearish reversal and b) mean-reverted the stock back to its 8-day moving average.
However, JCPenney shares remain hopelessly overbought in the near-term — the last time the MACD saw overbought readings this high was in the year 2012.
To be clear, overbought readings on momentum oscillators can remain so for an extended period of time. However, when this occurs with price reversals such as what we are currently seeing in JCP stock, there’s a good chance you’ll see at least something of a mean-reversion in momentum (and thus price).
Active investors and traders could now look to initiate partial short positions against the $12 area (i.e., the upper end of last week’s range), with a price target closer to the $10 area which would constitute a retest of former resistance (blue horizontal) as well as a 38.30% Fibonacci retracement of the entire rally from January into last week’s highs.
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