Back on 2-18-15 I wrote a post on JC Penny’s stock, JCP, proclaiming the virtues of what the charts were saying. Here we are 7 weeks later, I am back at you with a recommendation to sell the stock (at least ½ if not the entire position), as I did today. After a 12% while the SP500 was down fractionally during the same period, locking in some profits seems prudent right here.
At the time of my initial post here, an inverse head and shoulders pattern had set up and projected an upside target of almost 40%. That target combined with its risk/reward was so compelling it was one I couldn’t pass up on. Those that remember this post may be wondering why, if the target was almost 40% higher, would I be selling now only after a 12% gain. Below is a chart I posted at the time.
Below is the same chart 7 weeks later. Notice how price spike immediately higher after my post and was rejected at the first grey resistance line around $9.25. Once hitting that, It corrected lower, in fact, falling below my entry point and back down almost to the right shoulder. At the time I really thought I would be eating crow. Thankfully, my stop placement just below the right shoulder worked out perfectly as it was not hit and price immediately pushed higher back up to the grey resistance line today where it was, once again, rejected. This tells me this price level is hot and must be respected and as such I expect further consolidation and likely more downside from here. It does not mean it cannot eventually reach my projected 11.25 ish target price but, the pattern that made it such an attractive investment has been invalidated. So taking partial, if not all profits, is warranted.
I am circling back around to this post not only because it turned out to be a nice investment gain (an 89% annualized return is nothing to sneeze at), albeit a short holding period, it also turned out to be a great learning tool. Here is what you should take away from this example.
1. When investing make sure you clear your mind of biases and opinions. They can be very detrimental to making profits. Before this recommendation who really thought this investment, JC Penny’s, was going to outperform (and in this case massively so) the index? If you reread my post I had my doubts but what I have learned is to let those thoughts go and follow the charts (price)
2. Have a plan before you invest. You aren’t always going to be right so know what price level that is and make sure you incorporate that into an exit strategy that is established BEFORE you invest. If you are going to take a loss (and losses are a part of investing) keep the size of each loss small.
3. Taking profits on a portion of your position, once it hits your first level of resistance (these, like your loss exit point should be determined in your investment plan before you invest) and then adjusting your stops accordingly on the remainder will guarantee you can NEVER lose money on that investment. This is good risk management and should be considered on every investment. Sure, it doubles your transaction costs, but the cost of a transaction is so small as compared to most investment losses (even those with a plan), it is a practice all investors should follow.