J.C. Penney Shares Headed to $1?
Lights out for JCP.

Mall anchor J.C. Penney  (JCP)  fell below its floor before the open Friday as the stock crashed 23% on a negative reaction to earnings. I do not show nearby value levels, as my buy levels are below $3 a share. The stock traded as low as $3.51 before the open, but opened with a new post-election low of $3.85.  

J.C. Penney has been a turnaround story for more than three years, and this negative reaction to earnings pushed the stock into bottom-basement territory, solidly below the important $5 a share threshold.

J.C. Penney closed Thursday at $4.71, which provided an earnings warning. Why? Many brokerage firms do not allow investors to buy stocks trading below $5 on margin, where an investor owns the stock, not fully-paid for. When this happens, the investor must either make up the full purchase amount, or sell the stock. This "margin call" is a negative for the stock and makes it difficult for the stock to climb back above the $5.00 threshold.

At Thursdays close of $4.71, the stock was already down 43.3% year to date, and solidly in bear market territory 56.1% below its post-election high of $10.74 set on Dec. 8. The stock had a gain of 12.9% since its post-election low of $4.17 set on May 15. 

J.C. Penney has been below a "death cross" on its daily chart since Nov. 9 when the stock closed at $8.36. A "death cross" occurs when the 50-day simple moving average falls below the 200-day simple moving average, and indicates that lower prices lie ahead. This bearish signal remains on the chart today.

The Weekly Chart for J.C. Penney

Courtesy of MetaStock Xenith

The weekly chart for J.C. Penney needed a weekly close above its five-week modified moving average (in red) at $5.04, but this appears to be highly unlikely. The stock has been below its 200-week simple moving average (in green) since the week of Dec. 16, when this average was $9.70. This "reversion to the mean" is now at $8.08. The 12x3x3 weekly slow stochastic reading is projected to rise to 56.59 this week up from 55.17 on Aug. 4.

Investment Strategy: With the stock mired below $5 a share, it will likely fall into the category of being an "option on survival", which is defined as a stock trading between $1 and $3 a share. Buy weakness to my monthly and semiannual value levels of $2.31 and $2.17, respectively. Sell strength to my quarterly risky level of $6.84.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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