J.C. Penney Company, Inc. (JCP) reports earnings on Aug. 11, just one day after investors punished a weak quarter at rival Dillard's, Inc. (DDS) with a double-digit percentage stock price decline. J.C. Penney stock has ground out a more bearish price pattern in recent years, but long-suffering shareholders have shown a tendency to forgive and forget while the company shutters stores and institutes cash controls to underpin its long-term survivability.

Price action finally reached a crossroads after the stock broke the 2014 low at $4.90 in May 2017. It drifted as low as $4.17 following the breakdown but then turned higher, lifting back above $5.00 while setting off a long-term 2B buy signal that denotes the failure of bears to defend a new resistance level. Unfortunately, mixed action in the past month has failed to confirm that bullish signal, with this week's report likely to force a final judgment on the longer-term price direction. (See also: Factors Setting the Tone for J.C. Penney in Q2 Earnings.)

JCP Long-Term Chart (1990 – 2017)

J.C. Penney stock cleared multi-year resistance at $35 in 1992 and entered a healthy trend advance that stair-stepped into the 1998 high at $78.75. It plunged off that level into the new millennium, settling at an 18-year low at the end of 2000. The subsequent recovery unfolded into two broad waves that completed a V-shaped round trip into the prior high in 2007, ahead of a breakout that added just nine points into the February 2007 all-time high at $87.18.

The shares relinquished more than 70 points into the March 2009 low at $13.71, with that deep print giving way to a bounce that stalled at 200-month exponential moving average (EMA) resistance in the mid-$30s in the fourth quarter of 2009. Three additional tests at that level into 2012 failed to yield higher prices, with shareholders capitulating in a brutal downtrend that cut through the bear market low in 2013. The decline finally ended at $4.90 after testing the 1980 low in the first quarter of 2014. (For more, see: J.C. Penney at the Edge of the Abyss.)

Price action carved a broad basing pattern into 2016, bounded by resistance between $11 and $12. Support lifted toward $6 during this period, with buyers stepping in at that level twice into a 2017 breakdown that ended 73 cents below the 2014 low. The stock has retraced the May breakdown into August, ahead of an earnings report that could trigger a double-digit percentage move higher or lower.

JCP Short-Term Chart (2014 – 2017)

The 2014 recovery unfolded at a shallow trajectory, highlighting weak buying pressure as well as dilution triggered by reliquification efforts. The 200-day EMA eased from a downward into a horizontal orientation during this period, with buying waves stalling near or just above that long-term mean reversion level. Meanwhile, 2014 and 2016 rallies above $11 raised calls for much higher prices, which were then denied in reversals driven by aggressive short selling pressure. (See also: J.C. Penney to Close Up to 140 Stores.)

On-balance volume (OBV) fell off a cliff in 2013 and bottomed out in 2014, giving way to modest buying impulses that printed a series of lower highs into 2017. This slow-motion distribution has taken its toll, forcing multiple waves of bottom fishers to capitulate and exit positions. In turn, the stock has lost the shareholder base needed to end its long-term death spiral, raising the odds that it will eventually close up shop or get bought at a deep discount.

Traders looking to play the earnings reaction need to watch the 50-day EMA at $5.10. The stock remounted that level on July 13 and traded as high as $5.63 before turning tail and dropping back to the moving average this week. A breakdown would bring the May low back into play, with a decline through that level setting off major sell signals. On the flip side, a buy-the-news reaction would face heavy resistance at the 200-day EMA, now declining from $6.20. (For more, see: J.C. Penney Starts B2B Unit to Target Hotels.)

The Bottom Line

J.C. Penney reports earnings on Tuesday morning, with deeply oversold technical conditions competing with an exceptionally weak retail environment. A little good news could go a long way in this bilateral dynamic, but traders should expect the market to punish shortfalls and bad news mercilessly. (For additional reading, check out: Short Sellers Poised to Profit Off J.C. Penney, Macy's.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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