The JC Penney 30% Stock Rally: Part 2

Back in early March we noticed some interesting developments in shares of JC Penney. Due to a combination of failed breakdowns on multiple time frames and a bullish momentum divergence, we figured $JCP would rally 30%. Over the next 10 weeks or so we got that move exactly. But after further review, I think we can now see the next leg higher, at least another 30% rally from here.

This is the same weekly chart that caught our attention the first time around back in March. We're looking at the weekly bars showing a bullish divergence in momentum. We tend to pay more attention to these when they come on longer-term time frames. Notice the lower lows in price into January while the 14-period RSI was simultaneously putting in a higher low:

The next chart represents the daily candlesticks along with the 50 and 200 day moving averages. Look how prices have continued to consolidate sideways after hitting our initial 30% target. After a big rally, prices can correct in one of two ways: through price or though time. The more bullish correction, in my experience, has been when prices correct sideways to allow smoothing mechanisms to catch up, rather than correcting down to meet the mean:

I think a breakout here above this downtrend line (blue) and horizontal resistance (grey) would be the confirmation we need to signal that the next leg higher has begun. After a failed breakdown this massive (grey circle) and bullish momentum divergences on multiple time frames, we have to continue to give the bulls the benefit of the doubt. But the entry point, in my opinion, is only above this resistance. I'd prefer to only be long above 9.25-9.30. Below that and I would remain in the neutral camp, as we've been in since hitting our initial target.

This is actually a great example of being disciplined and backing off after hitting our initial targets. Also, this is another reason why we set "initial" targets, even though we might think we can see much higher prices in the stock. I think this squeeze can continue. We just waiting for the breakout. I would love it to come on a gap up higher, like we did in late February, but now we're just getting picky. Let's take what we can get.

I'm looking at that support from last August/September that ended with a gap lower on September 25. The next target is up there to fill that gap. The last report showed close to 30% of the float is still short. I'm curious to see how that has changed once the new numbers are released, but in all likelihood, not much has changed on this front. The shorts are still getting squeezed, and things could be about to get a lot worse for them. We'll see.

Make sure to follow me on Stocktwits and Twitter for follow up commentary on this name.

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Here is the video I did on Fox Business March 3rd talking about the strategy behind the initial trade and how we would reevaluate once our targets were met:

Tags: $SPY $JCP