Last July, I wrote an article on the case for the validity of the PPO/ADX “pincher play” pattern in a stock chart. In that particular instance, the Dow Jones Industrial Average (DJIA) and Google (GOOG) were used as prior examples making the point of Barrick Gold (ABX) possibly having found a bottom, so take a moment and check out that article for a bit more explanation.
In that particular case, Barrick looked to have found a bottom at $13.35 early in July as a second pinch was formed between the Percentage Price Oscillator (PPO) and Average Direction Index (ADX). As it happened, the ABX chart bounced to a high of $21.08 by the end of August, which has ultimately proven to be a strong area of resistance for ABX. Now, whether or not $13.35 was a true bottom for Barrick is always a moving target of the future, but at this point the lowest that the price of Barrick stock has dropped since the second pinch was $15.26 in December.
Just for reference, here is the ABX chart from the original article and as of today.
The interpretation of a second pinch forming at a higher level (slowly trending back towards the zero line) as the stock price trends lower is viewed by many pincher players as an indication that the stock price is hitting a bottom and ready to make a sharper move upward.
In essence, it’s also generally a positive divergence between the price per share and the Moving Average Convergence/Divergence (MACD, not shown) because the MACD and PPO often times follow the same path.
With those things in mind, take a look at the current chart for JC Penney (JCP) above. At this point, this is still a speculation because a valley in the chart has not formed yet. Further, the PPO has not yet begun to even make a rotation back upward and the ADX has not yet begun to start to turn downward. For clarity, look at the position of the candles and those two indicators in the ABX chart and it’s clear that they were already starting to turn back upward. That’s what pincher players will be looking for in the JCP chart.
Point being that if JCP doesn’t hold a support at $4.90 and makes a new all-time low, the green trendline drawn on the chart will have to be moved. The green trendline for the ADX is a speculative turning point for the indicator to be slowly trending back towards zero (in other words “making a higher low”).
On a first pinch, traders look for a bounce, which is exactly what JCP did, rising 65% from a low of $6.24 to a high of $10.30. On a second pinch, traders look for a true reversal of the chart. The question now is: Will $4.90 hold as a bottom support and the indicators start making their rotations? If so, there’s a good chance that JCP will see a nice move, based solely on technical merits. Of course, it always has to be said that technical analysis is only one component of trading/investing and no rule or pattern is foolproof.
Another caveat to consider for JCP is the fourth-quarter and full fiscal 2013 earnings report that is coming out of February 26. The beleaguered retailer said yesterday that same-store sales improved, but the small gain did not impress Wall Street. Safe to say that JCP certainly falls into the high risk/high reward category and that it has all kinds of fundamental forces that can weigh on the stock chart, but I’m still interested in whether this second pinch will once again follow through to produce a climb in share value in the near future.