Stock Quotes in this Article: A, AZO, INTC, RAI, T

BALTIMORE (Stockpickr) -- Do you own any toxic stocks in your portfolio?

If you do, it makes sense to sell before they get out of hand. Now more than ever, the toxic stocks are sending an important message to Wall Street. With the S&P 500 up more than 16% year-to-date, the few stocks that aren’t participating in this rally are the ones that you really want to unload.

To be fair, the companies I'm talking about today aren't exactly "junk."

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I mean, they're not next up in line at bankruptcy court. But that's frankly irrelevant; from a technical analysis standpoint, they're some of the worst positioned names out there right now. For that reason, fundamental investors need to decide how long they're willing to take the pain if they want to hold onto these firms this Fall. And for investors looking to buy one of these positions, it makes sense to wait for more favorable technical conditions (and a lower share price) before piling in.

For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

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So, without further ado, let's take a look at five "poison stocks" you should be unloading in September.

Agilent Technologies

First up is Agilent Technologies (A), the firm that’s presenting the simplest bear setup right now. While Agilent hasn’t had a bad year in 2012 (shares are only trailing the S&P’s awesome rally by around 3% as I write), it saw almost all of its upside in January and has been dying a slow death since then. The downtrending channel in Agilent is the price pattern to watch now, especially with shares testing resistance.

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Agilent’s channel lower hasn’t been the most orderly channel I’ve seen -- it’s downright haphazard compared to the June and July rally in the S&P 500. But that doesn’t really matter. All that matters is the fact that Agilent has gotten stopped and turned around every time it touched a support or resistance level.

With shares touching this trend line resistance level for the third time in 2012, it’s likely that we’ll see another bounce lower from here -- especially because it coincides with resistance at the 200-day moving average.

If you already own Agilent, go ahead and wait for the bounce lower before selling. Trendlines do eventually break, and it doesn’t make sense to sell prematurely if A is merely (really) late to the game on this broad market rally.

Intel

I’ll admit: Fundamentally, I like Intel (INTC). But I don’t like its technical setup right now. Over the last few months, Intel has been forming a bearish descending triangle that finally broke out at the start of September. So, like this stock as I may, I’d recommend getting out right now.

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The descending triangle is a pattern that’s formed by a horizontal support level that acts as a sort of “floor” for shares and a downtrending resistance level. As Intel bounced in between those two price levels, it was getting squeezed closer and closer to a breakdown below support. When that happened, investors had their sell signal (and more opportunistic traders had their short signal).

What’s significant about Intel is the fact that the price span at the start of the pattern was so wide. That width has implications for the downside objective (for more on that, check out our primer on Picking Price Targets).

So there’s a lot further for Intel to slide before its high probability price target down at $20 gets achieved. Caveat Emptor.

For another take on Intel, it also shows up on a recent list of 5 Stocks to Store Away for 5 Years.

AutoZone

The exact same setup is shaping up in shares of car part retailer AutoZone (AZO) right now. AutoZone is currently forming a nearly textbook descending triangle pattern of its own, with its horizontal support level right at $355. In real terms, the descending triangle is a significant pattern because it demonstrates that sellers are in control of shares.
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While buyers have historically been willing to step in with a bid at $355, every time that stock slips down to that level, some of the glut of demand is getting absorbed by asks. When all of the buyers get taken out at $355, AZO’s price is going to fall through support – when that happens, the “safety net” is gone, and downside becomes the high-probability price objective for the stock.

Momentum adds some extra confirmation to this downside setup: 14-day RSI has been stuck in a downtrend since before AZO topped back in May. Because momentum is a leading indicator of price, the fact that the downtrend is still in force doesn’t bode well for AZO shareholders.

While the stock’s most recent test of $355 held up yesterday, AZO is clearly getting close to a more significant breakdown. Watch out.

Reynolds American

2012 had been going well for tobacco giant Reynolds American (RAI). At the start of August, shares were up double-digits, and the stock was consolidating sideways, giving investors a chance to take a breather after a quick rally took shares from $38.50 to $46 in a matter of weeks. But the consolidation channel ended up getting broken to the downside, sending a bearish signal for RAI investors.

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Since then, shares have found support at $43, but it still makes sense to sell here. There’s a lot of downside risk left in Reynolds right now -- even with the firm’s hefty 5.4% dividend yield factored in.

For starters, our support level at $43 isn’t exactly a strong price level; so far, we’ve only got one “touch” of that price, versus four reversals at newfound $44.50 resistance. That makes downside price action more likely than upside right now. Volume supports that too.

The stock’s biggest volume spike came on a failed test of resistance, indicating that the most participation in RAI came when sellers were smacking this stock lower. I’d recommend waiting for a more meaningful support level before being a buyer.
At least you’ll get the possibility of an even bigger yield!

AT&T

Last up today is AT&T (T), the stock that’s probably the least toxic of the toxic stocks. Like Reynolds, AT&T is just now coming off the heels of a pretty prodigious rally, up more than 24% since the first trading session in January. But it’s the double top currently showing up in this stock’s chart that gets my caution flag waving.

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A double top is a technical pattern that’s formed when a stock makes to swing highs that top out at approximately the same price level. While this could just be the start of a consolidation range (a normal occurrence after such a big rally), a breakdown below support at $35 means that it’s not. That’s your sell signal.

The 50-day moving average has done a good job of acting as a proxy for support since the start of the year. If you want to avoid watching AT&T feverishly, consider setting up a trade alert on a breakdown below the 50-day. That’ll give you plenty of time to sell a breakdown below $35 -- and better still, it’s a more useful indication of a change of trend is AT&T continues to move higher. Like a trailing stop, the 50-day moves with shares.

For another take on AT&T, it also shows up on a recent list of 5 Bullish Stocks to Buy on the Next Dip.
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.