I closed JCP with the stock price 7.7% above the entry price, which of course is loss-making for a bear position. My trade was structured as short vertical option spreads. They closed for a loss on risk of 39.2%.
J.C. Penney Co. Inc. (JCP) was in a downtrend long before the markets hit their present state of jittery semi-panic. Thursday's bear signal is the seventh since the stock began its present downtrend in February 2012.
The pattern on the five-year weekly chart is, frankly strange -- an uptrend without any conviction consisting of wild swings that eventually carried the price to a peak of $43.18, and this year's trading has brought the price down to where it all began, with a low of $13.55.
This week's decline marks the fourth week to set a lower low.
Four the six completed downside breakouts since the present downtrend began have been successful, with an average yield of 13.1% over an average lifespan of 37 days. The two unsuccessful trades had an average loss of 10.6% over 12 days.
The resulting yield spread, 2.5%, is far from spectacular. But JCP is a very liquid stock of the sort I badly need to round out my holdings. I'm willing to accept a lower spread, since liquidity washes away many technical blemishes.
JCP was among 12 symbols that survived my initial screening. (See last night's post "Friday's Prospects".)
In my second-wave screening this morning, two symbols, NPSP and NTGR both failed confirmation. Mesmerized as I am by JCP's fine liquidity, I have ignored the other second-wave survivors so far. If JCP fails this analysis, then I'll look further.
J.C. Penney is a household name for anyone who has ever shopped at a mall. From its Plano, Texas headquarters, it operates 1,102 department stores in 49 states and Puerto Rico.
The company is decidedly not held in high esteem by analysts, who collectively come down with a negative 56% enthusiasm rating.
And no wonder! Penney reports return on equity of negative 30% with a high level of debt equal to 103% of equity.
It has shown losses the past five quarters, and accelerating losses the four quarters of that period, redeemed only by a slightly lower loss in the 1st quarters of 2013. In the seven prior quarters the company made profits but without a trend. It has surprised to the upside seven -- the profitable quarters -- and to the downside five times -- the losing quarters.
Institutions own nearly all of Penney's shares, whose price is way low. It takes only 29 cents in shares to control a dollar in sales.
JCP on average trades 6.8 million shares a day and supports a wide selection of option strike prices with open interest running to the four- and five-figures. The bid/ask spread on front-month at-the-money puts is low, at 2.2%.
Implied volatility stands at 55% which, although high compared to the VIX, is near the bottom of JCP's six-month volatility range. It has been tracking sideways since mid-May.
Options are pricing in confidence that 68.2% of trades will fall between $13.43 and $18.47 over the next month, for a potential gain or loss of 16%, and between $14.74 and $17.16 over the next week.
Trading in contracts is very active today. Calls are trading at 2-1/2 times their five-day average volue, and puts at 1-1/2 times volume.
The fair price zone on today's 30-minute chart runs from $15.80 to $16.27, encompassing 68.2% of transactions surrounding the most-traded price, $15.92. The stock opened above the zone and dropped steadily for three hours to the zone floor, before reversing to the upside. With a bit less than three hours to go before the closing bell, JCP is trading around the most-traded price.
J.C. Penney next publishes earnings on Aug. 12.
Decision for my account: I've opened a bear position in JCP, structuring it as a vertical credit spread expiring in July, short the $28 call and long the $18 call. The leveraged position provides a maximum yield at expiration of 39.9% and is hedged so that it provides a 4.2% cushion of profit above the entry price.
References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Disclaimer
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.
Tim, how did it trigger the stop loss? It did not appear to break the 10 day channel.
ReplyDeleteUnder my rules I set an initial stop loss that is double the average true range away from the entry price. It stays at that level until the opposite 10-day boundary becomes closer to the current price. So in JCP's case the initial stop loss was still the closest.
DeleteI would have closed the position on Friday in any case. The option spreads expire in July, an dit would take a new break below the 20-day price channel before JCP would be eligible for a roll to August options.