Time to Play a Penney Turnaround?

 | Jun 23, 2014 | 9:00 AM EDT
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There is always a danger when confronted with a turnaround story.

Investors see a stock that's been hammered and are tempted to jump in because it's on sale. The trouble is, so-called cheap stocks often become even cheaper. Time needs to pass in order for the wounds to heal. Eventually, the stock does become a worthwhile buy, but usually by this time individual investors are no longer paying close attention.

A good example of this is Hewlett-Packard (HPQ), which has climbed 25% since Jim Cramer featured it on "Mad Money" late last year. It's easy to forget that Hewlett fell for three straight years (2010, 2011 and 2012) in a bull market, plunging to $12 from $54 during that span. For a time, it seemed the company could do nothing right, as the once-proud brand became a subject of scorn and ridicule. 

A fair question would be, what is the next Hewlett-Packard? Ladies and gentlemen, I give you J.C. Penney (JCP). The company and the stock suffered mightily under the hand of former CEO Ron Johnson, but he's been gone for more than a year. Expectations are low and so are comparisons.

As for the technicals, the bleeding has stopped. On the daily chart (not shown), JCP is trading above both its 50-day and 200-day moving averages, something that didn't happen during 2013.

Of greater interest is JCP's weekly chart (below). An inverted head-and-shoulders pattern has formed. This large bullish pattern originated in September last year. JCP needs to break above the neckline of the pattern, located at $10.30, but first the stock will first need to climb above its 50-week moving average (blue), currently at $9.46. This would be an important break, as JCP hasn't had a weekly close above this indicator in more than two years. Based on pattern measurement, this stock could reach $13, a gain of 45% from Friday's close.

Notice also how the relative strength indicator (RSI, bottom of chart) has been climbing as the price consolidates (purple lines). This is referred to as divergence, as the indicator has deviated from the price. Technical analysts who use divergence believe that the price will turn higher to match the indicator, which is making higher lows and higher highs.

In summary, Penney's stumbled badly, but the company hasn't shot itself in the foot recently, so perhaps its potential demise has been exaggerated. Expectations for the company remain low. I'm entering a half position here and I'll buy the other half if the stock can climb above $10.30. 

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
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