JCP 10/2/2013 – Is That Your Lucky “JC” Penny?
Due to the recent woes of a well known brand, JC Penny (JCP), I thought I would publish a couple of charts showing why I do not think JCP should be purchased just yet, if indeed JCP was a stock that you were interested in owning. It is usually less risky to wait for a bounce and a retest of the bottom.
I consider JCP a risky play – it is a struggling department store from the past. Do you remember another one, Montgomery Ward? They had the best catalog around. I used it as my sole source for determining the things to put on my list to Santa Claus. However, as Hawk Harrelson would say (a Chicago White Sox radio announcer) “He Gone!” Montgomery Ward eventually filed for bankruptcy. JCP could be on its way too. I have not studied its fundamental woes – you know me. I only look at things from a technical perspective.
So in stating that, this is how I am breaking down JC Penny’s charts. In this first chart, a2 year daily candlestick chart, I am using the Fibonacci Extension tool to try and estimate the length of Wave C since it appears to me that JC Penny is near the bottom of an A-B-C zig zag corrective pattern that started in February 2012 (that is a lot of pain and suffering if you were a shareholder all that time). If you are unfamiliar with the basic Elliott Wave pattern, click here before looking at the chart.
So why is it important to try and identify the bottom of an A-B-C corrective wave pattern? You could potentially be buying in near the bottom. Did you look at the basic Elliott Wave pattern from above? Well, after an A-B-C corrective wave pattern completes, it is not uncommon for a Wave 1 through Wave 5 pattern to start again. Sometimes you might get a series of triangles or other corrective patterns. Regardless, JCP with some volatility could offer some excellent trading opportunities.
If you recall from a previous article or two of mine, I mention that the Fibonacci Extension tool is an excellent tool when placed on the correct anchor points. So why do I think I have the right anchor points above for Wave A and Wave B? Well, let’s take a look at the next chart, a close-up of Wave A and B from the above chart. But on this chart, I use the Fibonacci Retracement tool. Look at my notes on the chart down in the volume section.
Based on the above analysis that is almost “textbook”, I feel confident in identifying the bottom of Wave A. The top of Wave B is easy, go the next highest point after the completion of Wave A, but before the next downtrend starts.
By having Wave A and Wave B identified, it then allows for the proper placement of the Fibonacci Extension tool that I used in the first chart above. A properly placed Fibonacci Extension tool is a very powerful tool.
Now, I like to look for additional confirmations when searching for the bottom of Wave A. So let’s see if we can take the next chart and divide Wave A into a 5 wave pattern to the downside. Remember, it has to have the right look and feel too, an important Elliott Wave characteristic.
One thing I did not mention on the above chart, Wave 3′s are usually the most powerful and, when going downwards, usually the most demoralizing wave that incites a lot of selling and resulted in the gap-down. The pain did not end there as there were still several months of declines left to finish out Wave 5. The completion of Wave 5 also then completed Wave A to the downside.
That wave breakdown looks almost textbook – Waves 1 and 5 are of similar declines while Wave 3 was the most powerful and the largest wave. That meets all the Elliott Wave rules that I have listed here.
That gives me another confirmation on the proper identification of Wave A and Wave B.
So now I want you to take a moment and scroll back up to the top of the article – click on the first chart again now that you have a better understanding of the Elliott Wave breakdowns. I’ll wait.
On an A-B-C zig zag pattern, it is very common for the lengths of Wave A and C to be of similar length. By placing the anchor points for the Fibonacci Extension tool at the top of Wave A, the bottom of Wave A and the top of Wave B. The tool will then project the length of Wave A which can be used to estimate the length of Wave C. In this case, the tool projects an estimated bottom around the $8.43 area. Once arrived there, other signals should be looked for that the downtrend has stopped, such as a reversal candlestick formation. Remember, Elliott Waves are dynamic and the $8.43 bottom is only an estimate which should be confirmed with a reversal candlestick formation.
Once a reversal signal is noticed, a bounce may be in order. How high can the bounce go? Let’s look at the above chart again that has the Wave A breakdown for an example. Notice how the top of Wave B ran back up to the 38.2% retracement line, sitting at $28.27? Well, after a long downtrend, most stocks pull back at least 38.2%, some stocks pull back higher. But I like to usually start with a more “conservative” outlook when analyzing a potential stock trade.
What this basically means is that after Wave C is completed, there is a good chance from a technical perspective that the stock will pullback to the 38.2% retracement line as seen on the next chart.
When I placed the Fibonacci Retracement tool on the above chart, I used the $8.43 projected bottom. That bottom works well as the gap-down and heaviest volume at the time occurred at the 50% retracement line, a very common occurrence, by using the $8.43 bottom. This is the same breakdown that occurred on Wave A. Wave A and Wave C appear to have very similar gap-downs around the 50% retracement lines. This gives me greater confidence that the $8.50 area will hold as a bottom.
I will consider using a portion of my portfolio that I allocate towards more risky investments. JCP falls into this category as I heard its fundamentals suck. The above trade I am trying to execute is based purely on chart technical analysis. I hope I can call this trade at a later date “my lucky penny”. Maybe, just maybe, that lucky penny can even magically turn into 2 pennies.
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Disclosure: I currently own no shares of JCP but may consider purchasing some shares once it appears the downtrend is over with the formation of a nice reversal candlestick; I am anticipating one in the $8.50 area.