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JC Penny - Channeling Its Downtrend & Analyzing Its Rebound

|Includes:J.C. Penney Company Inc. (JCP)

For those that are interested in turn-around stories, I last discussed JC Penny (NYSE:JCP) on October 2, 2013 and stated why I did not think that JCP should be purchased just yet. Let's re-look at its charts now that a little more time has passed and determine if JCP is worth another look yet.

I am going to start by using a channeling method to try to analyze JCP's 2 year downtrend.

When placing a channel on a stock chart, there are typically 3 anchor points. Place the first anchor point at the beginning of the downtrend. Place the second anchor point at the end of the downtrend. Place the third anchor point at the widest point of the downtrend. When doing that on JCP's 2 year weekly candlestick chart, the results should look like this:

JC Penny (JCP) Downtrend Analysis

Notice how in the most current week JCP is trying to move outside of the channel? This could be an indication that JCP's downtrend has indeed ended. But just remember, even though the 2 year downtrend has possibly ended does not mean that there could not be a retest of the $6.24 bottom.

So let's zoom in on the last 3 months of activity since it hit the potential bottom of $6.24 and analyze it further. When I look at a 3 month, daily candlestick chart for JCP, I do potentially see a Complete 8 Wave Pattern that completed. JCP could be starting the formation of a new 8 Wave Pattern upon breaking out from the downtrend channel.

JC Penny (JCP) Elliott Wave Perspective

The above potential Elliott Wave breakdown meets all of Elliott's wave rules. The ratio of uptrend to downtrend days also falls within Fibonacci relationships - there were 38 uptrend days (Waves 1-5) as compared to 15 downtrend days (Waves A-C).

38 uptrend days X 38.2% = 14.5 downtrend days

38 uptrend days X 50% = 19 downtrend days

38 uptrend days X 61.8% = 23.5 downtrend days

On the above chart, Waves A-C are 15 days in total, which does fall just over the 38.2% Fibonacci ratio of 14.5 downtrend days I calculated above. So JCP does meet the ratio of uptrend to downtrend days test.

When looking at JCP's recent pullback in terms of price rather than in days, JCP pulled back to the 61.8% Retracement Line as seen on this next 3 month daily candlestick chart.

JC Penny (JCP) 61.8% Pullback Completed

So if JCP has indeed finished its Corrective Wave Pattern and has started a new 8 Wave Pattern, then if any pullback occurs over the next week I would not expect JCP's share price to fall below $7.80, which is the bottom of the potential Wave C area on the above chart. A print of $7.79 would indicate that JCP is still in a Corrective Wave Pattern.

If JCP has started to develop its next 8 Wave Pattern, then let's use the Fibonacci Extension Tool to determine some potential short-term price objectives calculated using the first potential Complete 8 Wave Pattern.

JC Penny (JCP) $12-$14 Price Objective

So in summary, I have potential upside in a JCP trade of $12 - $14, and downside of $6.25. The risk reward ratio seems like a decent one, I may have to try and re-analyze JCP's 2 year downtrend from an Elliott Wave perspective in the next few days to determine if it truly looks like the downtrend is over or not.

Price and volume action over the next few days as I am analyzing potential wave breakdowns will be early clues until the Elliott Waves have been re-analyzed. The above analysis so far does point to a completed downtrend for JCP, but I usually like more than 1 method of technical analysis to support a potential bottom before investing my hard earned capital.

Disclosure: I currently have no interest in JCP but may consider initiating a small trading position of 1%-2% of my total portfolio in the next week depending upon the price and volume action over that time period.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JCP over the next 72 hours.

Stocks: JCP