Is JC Penney Setting Up For Another Leg Higher?

The JC Penney trade is something that I've been actively involved with since early March. The bearish sentiment unwind that has sent shares soaring over the last 6 months has been one of the more fascinating things to witness in recent times. The amount of negative feedback I've received along the way has also been interesting to watch. People don't believe the, "turnaround story". Whatever that means. But we just like to focus on the supply and demand dynamics.

For a little bit of background, this name first grabbed my attention when it gapped higher in early March. This move came off bullish momentum divergences on both the daily and weekly timeframes. The huge short interest was also a major bullish signal (See: Blog Post and See: TV Interview).

Once our 30% upside target was hit two months later, prices continued to consolidate nicely. When prices keep bumping their head against a level, it's almost inevitable that it will break through. This is precisely what we hoped for when I suggested in early June that $JCP had another 30% upside from that point. It was, "JCP the Sequel" for us (See: Blog Post and See: TV Interview)

Now I see shares of $JCP setting up in what appears to be a bullish flag. I don't know of a better way for prices to digest big gains than in a high and tight range. This is precisely what we see here. Look at this tight consolidation in price since late August:

Also notice how momentum, based on a 14-day RSI, has been in a strong bullish range since early March. When prices rally, momentum gives us overbought readings, but never hits oversold conditions during corrections. In addition we have upward sloping 50 & 200 day moving averages which makes it difficult for the bears to gain control. These characteristics are exactly what we want to see in order to continue to maintain a bullish bias. Once prices break out of this range, this would be the confirmation that this is indeed a bull flag and a stock we would only want to own above the late August through early September highs.

Now as far as a price target is concerned, there are 3 reasons why the 12.40-12.90 area seems to be the most appropriate. First of all, our polarity principles teach us that former support should turn into resistance. In other words, where there were once buyers that eventually dried out, there should be sellers in control of that given price level. There was a double bottom in August of 2013 that broke down a month later. This former support is the first reason why this area is our next target.

From a Fibonacci perspective, I really prefer when several Fib extensions cluster around the same area. This is especially the case when we have former support and resistance levels confirming that area to be important. In this case we have two 261.8% Fibonacci extensions in the 12.60-12.90 area that we get based on the last two price corrections. The first being the March-April correction and the second more recently from mid-May to early June.

This is how I come up with my targets, when multiple levels cluster together. The market isn't perfect, far from it. So to give a specific number makes little sense to me. I rather have some sort of area or range that I'm targeting and then reevaluate once we achieve that target. Since early March this is exactly what the strategy has been and it continues to work.

I'll do my best to update this chart upon any further developments. But from a risk/reward standpoint, I think you guys get the idea.

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Tags: $JCP