Why JC Penney Has 30% Upside From Here

With markets "in turmoil", if you will, the already hated and beat up names don't get the attention anymore. When the S&P500 is hitting all-time highs and companies like JC Penney are gapping down to historic lows, there's no sexier headline. But when geopolitics are supposedly sending stock markets lower around the globe, good ol' $JCP gets ignored.

So let's give $JCP some love and look at what's happening here across multiple timeframes. The first one is a weekly chart showing a nice bullish divergence and false breakdown:

Notice how on the most recent break last month, momentum measured using a 14-period relative strength index put in a higher low. As a technician, when I see a failed breakdown to new lows, a bullish divergence like this is my catalyst to get full out bullish.

As David Asman on Fox so eloquently pointed out to me last week, a stock can go to zero. And he's right. So when entering a beat up name like $JCP we have to protect our downside. The big question here always is, Where are we wrong?

Here is the daily candlestick chart where I included a 50 & 200 day moving average. We can see here just like in the weekly chart that a nice bullish divergence developed in momentum at the most recent lows. The quick recovery is normally my best friend in this case. But more importantly this one came on a gap higher, which to me is even more bullish. This gap higher brought us back above the October lows as well as back above the 50 day moving average:

This gives us a clear out in the case that we're wrong. Last week's lows & 50 day moving average becomes our line in the sand. If prices break down below these levels, things get messy and we don't want to be a part of it. That presents a favorable risk/reward opportunity, which is all we can really ask for right? The bulls here want to see more upside follow through soon though. But so far so good.

Target-wise, I don't see why we can't get back up to those early December highs. By then, the declining 200 day moving average should be somewhere around there. It looks to me like this would be a good place to take some profits and then reevaluate the entire situation.

Now look how well it's behaving on a relative basis. We can start by mentioning that with S&Ps and global equities markets getting destroyed to start the week, JC Penney is up over 4% - a standout leader (did I just that about JCP?). Look at it relative to the S&P500 breaking down to new lows and quickly reversing. This is the most beautiful setup for me and it looks like shares of JCP should outperform going forward.

Correlation-wise, this one is on its own. Shares of $JCP have a -0.80 correlation with the S&P500 over the past year. This is mostly due to it crashing while S&Ps have been hitting historic highs. But shorter-term there is a 0.0 correlation over the past quarter, which seems more reliable than such a negative correlation might represent. We love that lack of correlation on a stock market that we are clearly negative on.

So for right now, it's all systems go into shares of $JCP. We have our out and we want to stay disciplined with that. But with all the hate out there and bullish momentum divergences across multiple time frames (both on an absolute and relative basis), this beat up name is a screaming buy.

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Tags: $JCP $SPY