Stock Quotes in this Article: CAT, GM, SPLS, VNO, CTSX

BALTIMORE (Stockpickr) -- Are you poisoning your portfolio? If you ownthese five toxic stocks, you might be.

I’ve made it no secret that I like stocks right now. In fact, I’ve been harping on the technical and fundamental reasons for buying equities since the start of the summer. But while I like stocks, I don’t like all stocks.

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While stocks look strong in general right now, this isn’t a “dartboard market.” By that, I mean that we’re not in the sort of stock market where you can find success by throwing a dart at a board full of ticker symbols (something that may pass for a successful strategy during a roaring bull market). Yes, stock picking is particularly valuable right now -- and knowing which stocks to avoid is more than half the battle for the best stock pickers out there. That’s why we’re taking a technical look at five names that could be toxic for your portfolio this fall.

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

I mean, they're not next up in line at bankruptcy court -- and, in fact, I even like a couple of this week’s names fundamentally. 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.

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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.

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

 

Citrix

First up is $14 billion IT services firm Citrix (CTXS). The price performance in CTXS has been impressive -- shares of the firm have rallied more than 24% since the start of 2012, but that doesn’t tell the whole story.

One quick look at Citrix’s chart says it all: This stock is stuck in a downtrend right now. Despite rallying hard for the first few months of the new year, Citrix has been bouncing lower within a trend channel for the majority of 2012, erasing those gains along the way.

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The width of the channel is particularly problematic for Citrix shareholders. Because it’s a wide channel, Citrix has a particularly long way to fall before it catches support again. For shareholders, that’s produced some hair-raising declines this year, even if the subsequent bounces to resistance have provided a false sense of security. The implications of a downtrending channel are pretty simple: Until CTXS breaks outside of the channel, its high probability outcome is to stay stuck trending lower.

While CTXS’ channel is somewhat shallow, that’s cold comfort for investors who have watched their positions slide by double digits since the start of the summer. The fact that Citrix hasn’t participated in the broad market rally is another warning sign.

I’d recommend staying away from this name for the time being.

Staples

Office supply retailer Staples (SPLS) is forming the exact same setup as Citrix right now -- only it’s falling faster. Shares of the $8 billion firm have fallen more than 30% since mid-March, missing out completely on the rally that started at the beginning of June.

In Staples’ chart, it’s clear that trendline resistance and support aren’t equal. Resistance has smacked shares of SPLS down at least six times already over the course of the pattern, vs. around half as many bounces off of support over that same time period. The comparative strength of the resistance line means that sellers are willing to take lower and lower prices for their shares right now; clearly, buyers have exhausted their capital or their patience here.

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A glut of resistance levels makes upside even more challenging for Staples right now. This stock is facing resistance at the overhead trendline as well as two overhead moving averages. When you see resistance, think “sellers.” That abundance of sellers willing to unload shares nearby means that it’s going to be tough for SPLS to make a higher print in the near-term unless something changes.

I’d avoid being long here.

Caterpillar

It’s not exactly time to run for the hills in shares of heavy equipment maker Caterpillar (CAT), but we’re not far off now. CAT has been getting plenty of attention (and not the good kind) after lowering guidance, announcing a price hike, and cutting jobs from its factory line. But early signs point to more bad news for shareholders. That’s why I’m recommending that you stay away from this stock.

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Right now, CAT is in the early stages of forming a head and shoulders top, not a particularly good sign, especially since shares of the $56 billion firm are a lot closer to their near-term lows than their highs. The head and shoulders indicates exhaustion among buyers, so it tends to be a particularly difficult setup for longs to overcome.

While CAT still hasn’t formed its right shoulder, the trading implications are the same as long as shares fall through their $82.50 neckline. That’s the signal the CAT is set to make a move lower.

Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”

Don’t get caught on the other side of shorts on this trade.

General Motors

Here’s another stock that’s in make-or-break mode right now: General Motors (GM). 2012 has been a pretty unspectacular year for GM -- shares of the Detroit automaker have moved around 13% higher since January, falling a couple of hundred basis points shy of the S&P 500’s performance over the same period. And now, with shares looking toppy right now, I’d recommend investors take a second look before hitting the “buy” button.

GM made a near-term high in September, pushing up through the $25 level only to get swatted back down to support at the 200-day moving average. That’s a signal that there’s a glut of supply of shares at $25. In other words, it’s a price where sellers are more eager to sell and take gains than buyers are to buy.

While GM did manage to break its downtrend from the spring, this stock’s uptrend is tenuous right now and it’s testing support. A break below support means that GM is back in downtrend mode.

Momentum adds some important food for thought for GM buyers – the uptrend in RSI broke back in September. Since RSI is a leading indicator of price, that’s a red flag worth heeding in October. While support hasn’t been broken yet, I’d recommend selling a break below the 200-day moving average.

Vornado Realty Trust

Last up is Vornado Realty Trust (VNO), a $15 billion office and retail REIT that has operations spread from New York to California. VNO rallied hard into the end of 2011, but shares topped out by May. Since then, this stock’s been consolidating sideways and looking considerably more bearish. Here’s why.

VNO is currently forming a descending triangle, a setup that’s formed by a downtrending resistance level above shares and a horizontal support level below them. Essentially, as shares bounce in between those two price levels, they’re getting squeezed closer and closer to a breakdown below support. For VNO, that support level comes in at $79.

It’s important to think of technical patterns in real terms (in terms of buyers and sellers) rather than in terms of shapes; the “descending triangle” title is a good way of describing how the setup looks, but it’s a poor way of describing why it works. Instead, think of resistance as the place where sellers are more powerful (or more eager) than buyers and support as the place where buyers are more powerful than sellers. Because VNO has been making lower highs, we’ve got an indication that sellers are exerting more and more control over this stock. Momentum (again, measured by RSI) backs up that argument with a downtrend.

The fact that a REIT yielding 3.44% hasn’t caught a more substantial bid after QE3 is a negative sign; I’d steer clear of shares until the longs wake up.

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.