J.C. Penney (NYSE: JCP [FREE Stock Trend Analysis]) hasn’t had the best run when it comes to retail stocks. Bill Ackman made the news Monday by selling his 18 percent stake in J.C. Penney claiming failure in the investment.
When fundamental meets technical analysis
Without diving too deep into the numbers, it is clear that J.C. Penney is in trouble. The marketing plans have generally failed and they are losing the image they once maintained. In J.C. Penney’s last earning call they reported a wider second-quarter loss as comparable sales fell 12 percent. J.C. Penney does have some cash on hand, so traders will have to see if the company can turn its business around.
Technically speaking, J.C. Penney has been on the decline for some time. Shares have been on a steady cascade lower since making highs February 2012. Once J.C. Penney fell below the 200 day moving average, it formed and executed four large bear flags, and it currently is in one now. With another large investor out of the way and a pattern break down on the charts, this looks like an opportunity to get short J.C. Penney has presented itself.
With volatility elevated due to the recent sell off, traders might want to run a ratio spread. This will allow traders to run the trade for a small credit and take advantage of a move lower. The first target on this bear flag breakdown is $12.40, which marks the bottom of the flag. The ratio spread involves buying the 13 strike put and selling two of the 12.5 strike put.
The breakeven for this trade should be 11.80, so if JC Penney falls below that level, traders should close out or adjust their position. The sweet spot here would be at 12.50, where traders can earn max profit, which also lines up with the aforementioned target.
If this assessment fails and shares begins to climb, then traders will collect the credit on the trade.