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Major turning points in football and stocks

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On Friday, the mighty Buffalos of Colorado squashed the hopes of Cornhusker fans, but there were major turning points in the game. Just as there are turning points in a football game, there is a longer-term turning point for a stock when it begins entering what could be a new bullish phase. For retailer JC Penney (NYSE:JCP) that time is perhaps now as the stock battles its longer-term downward trend.

JC Penney Chart -

Shares of JC Penny (NYSE:JCP) are among this year's best performing stocks. From its December 29th close of $10.87 the stock is up nearly 151% and just starting to break above its longer-term downward trend. In point/figure terms, the stock is just beginning to turn the corner on what could be a longer-term move higher. The buy signal back in January at $12.50 and completion of that column gave bullish traders a vertical count of $21.50. That price objective has been exceeded. Now bulls are left with a recent "bullish triangle" pattern and the probabilities study from Professor Earl Davis. That study indicated the bullish triangle was profitable 71.4% of the time, for an average gain of 30.9% over an average 5.4-month time frame. A 30.9% gain from the action point of $26, would give bulls a target of $33.80 to be shooting for in the next several months.

JC Penny Chart -

Lots of investors shun the non-glamorous retailing stocks. "They're slow movers and have limited upside" is the thought. In June of 1998, shares of JCP traded in the high $70's. I like 1/2 position bullish in JCP here at $27.44 and add to it on close above $29 or pullback and bounce from $23-$24. Near-term target would be the $33.50 level, which is pretty close to average probabilities from Professor Davis' study.

The JCP May $25 calls (JCPEE) are offered at $5. The "out-the- money" May $30 calls (JCPEF) are offered $2.50. Purchase of either would have the trader thinking the stock ends trading higher than the $35 level by next spring. I think the best way to play is to buy the underlying stock, then use potential strength as an opportunity for a covered call.

Jeff Bailey
Senior Market Technician
Option Investor

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