Friday, December 14, 2012

JCP: Suspect breakout

The retailer J.C. Penney Co. Inc. (JCP) has broken above its 20-day high, $19.79, and continues to push higher on a leg that began Dec. 5 at $17.10. that leg is part of a slightly broader uptrend that began Nov. 16 from $15.69, reversing a downtrend lasting since mid-September.

The breakout happened on Thursday, followed by a pullback, and then another break above the 20-day high that has been continued today up to $21.50 (so far).

The chart raises a perennial question for traders who make their living off of price reversals: When is a breakout not a breakout.

The stock has been on the decline since Sept. 20, with a few relatively shallow retracements to the upside. The slide has lasted long enough that the 20-day high is also declining, day-by-day, in an echo of the month-old price decline.

So, looking purely a price reversal levels, the current breakout means precisely nothing. There is no near-term resistance that it has punched through. The breakout level is just an arbitrary pebble in a featureless fall.

The nearest  break above resistance is at $27, quite a distance away.

Unlike the classic Turtle Trading rules that my trading rules are based on, I treat all breakouts as suspect. Any breakout must prove to me that it is in fact based on price and not just an arbitrary span of time. Twenty trading days is four calendar weeks. What makes that special?

On the other hand, the breakout has a good tail-wind behind it, with a trend score of 107% of the average daily trading range. Anything above 100% deserves to be considered seriously, in my book.

J.C. Penney is a household name and so its business model needs ot explanation. It's not among the glitterati of retailers, but it sells good, solid products, and what's not to like about a store where my grand-daughter's  great-great-great-grandmother might have bought her dresses.

Analysts, however, are less impressed with the history. In aggregate they give JCP a negative 63% enthusiasm rating.

And the long-term chart supports that assessment. The stock has been executing a large sideways move since the beginning of 2009, ranging from below $20 to above $40. Obviously, there's money to be made from such wide swing, but the chart really isn't going anywhere.

Nor are the finances. J.C. Penney has a negative return on equity of -8%. The debt isn't awful, standing at 84% of equity.

The company has reported accelerating losses the last three quarters. Like all retailers, JCP makes its money mainly in the the 4th quarter. The 2011 4th quarter was profitable but still down from the year-ago quarter.

Of the past 12 quarters, eight have shown upside surprises, and three -- the unprofitable ones -- have surprised to the downside, meaning the losses were worse than analysts expected.

Institutions own nearly all of the shares, and price -- no surprise -- is cheap. It takes 31 cents in shares to control a dollar in sales.

JCP on average trades 9.8 million shares a day and supports a wide selection of option strike prices, with open interest mainly in the four figures, sometimes in five, and extremely narrow front-month at-the-money bid/ask spread on calls of only 1%.

Implied volatility, at 77%, is high, in the upper half of the six-month range, and has been in an uptrend since Nov. 30.

Options are pricing in confidence that about two-thirds of prices will fall between $16.65 to $26.17 over the next month, for a potential 22% gain or loss, and between $19.13 and $23.69 in the next week.

Options are trading very actively today, with calls running 60% above their five-day average volume, and puts at 180% above the average. Note the preponderance of bearish put trades compared to bullish call trades in the direction of the breakout. Yet another cause for caution.

The fair-price zone on today's half-hour chart fruns from $21.13 to $21.49, encompassing about two-thirds of transactions surrounding the most-traded price, $21.36. The price moved up to that level after 90 minutes of trading, and remains there with three hours of trading left in the day.

J.C. Penney next publishes earnings on Feb. 27.

Decision for my account: I'm not trading this week as I await a resolution of the budget talks in Washington, and more important, negotiations over the debt ceiling.

Even if I were trading, I would not take this trade based on the fact that the breakout signal doesn't map on the chart to any true move beyond resistance. The abysmal financials and vicious opinion of analysts simply reinforces that decision.


My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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