J.C. Penney Co, Inc. (JCP) heads into a critical first-quarter earnings report this week, with the old school mall anchor now testing the deep downtrend low posted in early 2014. A breakdown could signal a painful decline to an all-time low while presaging an eventual bankruptcy or fire sale to a better-positioned rival. It’s foolish for bulls to rule out with either outcome, given the company’s multi-year fall from grace as a result of the paradigm shift into e-commerce.

Look for the report to provide a status on reorganization plans that include closing 130 to 140 stores, in hopes of generating $200-million in annual savings. The company lowered guidance after February’s fourth quarter report, reducing EPS estimates to 40 to 65 cents per share compared to 58-cent consensus, with a sell-the-news reaction now likely if they fail to achieve those numbers.

JCP Long-Term Chart (1993–2017)

JCP

The stock broke out above 1987 resistance at $33 in 1992 and entered a strong uptrend that stair-stepped into the 1998 high at $78.75. It got sold aggressively for the next two years, finally coming to rest at the end of 2000 just a few points above the all-time low near $5.00, posted in the 1970s (blue line). A two-legged recovery wave completed a 100% round trip into the prior decade’s high in 2007, yielding a breakout that failed after adding just 9-points.

It then joined world markets in the 2008 economic collapse, losing more than 80% of its value into the March 2009 low at $13.71. The bounce into 2012 exhibited critical weakness, stalling at the .386 Fibonacci selloff retracement level, with Amazon.com, Inc. (AMZN) and other Net juggernauts taking greater market share from mall anchors than expected by Wall Street analysts of that era.  

The February 2012 high at $43.18 marked a major turning point, ahead of a steep decline that accelerated in 2013 after the stock broke support at the 2009 low. Bulls and bottom feeders took a stand at the 2000 low a few months later, generating high volatility in a support test that’s still in progress more than three years later. Meanwhile, price action has settled on the 1970s low, with a breakdown opening the door to a potential death spiral.

Bulls will retain a modest advantage into earnings because the monthly Stochastics oscillator has dropped to the most extreme oversold technical reading since 2008 and 2012, increasing odds for a crossover that triggers a long-term buy signal. Unfortunately, the stock failed to attract healthy buying interest after the last two cyclical turns, waving a red flag in a dangerous scenario that’s already heavily weighted to a bearish outcome.

JCP Short-Term Chart (2015–2017)

JCP

A March 2016 rally attempt failed just below $12, yielding two additional tests in the second half of the year. Aggressive sellers took control at the start of 2017, generating a steady decline that’s now reached within 50-cents of the lows posted in the 1970s and 2014 (blue line).  The failure to hold this historic level could trigger dire circumstances, setting off a panicked run for the exits by remaining shareholders.

On Balance Volume (OBV) plummeted in the second half of 2013 and had continued to lose ground in a steep decline that indicates aggressive distribution while vertical pops within this bearish pattern signal periodic short squeezes. The indicator has now fallen to the lowest low of the decade, loved by bottom fishers while abandoned by institutions and retail investors. None of this bodes well for the brick and mortar retailer.

The Bottom Line

J.C. Penney needs to staunch chronic bleeding with an optimistic earnings report this week or risk a breakdown that could presage a major implosion. An upside is possible given the deeply oversold technicals but a long term fix seems unlikely due the continuing exodus out of traditional retailers and into e-commerce sales.  

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