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5 Toxic Stocks to Sell Now - views
BALTIMORE (Stockpickr) -- With the S&P 500 making new all-time highs this week, it's more important to have exposure to any stocks than it is to be a stock picker, right? Wrong.
Even though a rising tide tends to lift all ships, the same can't be said for the boats with holes in them. Let's face it -- some stocks are downright toxic for your portfolio, even in a bull market. Those are the ones that make sense to sell sooner rather than later. Today, we'll take a technical look at five toxic names to unload this month.
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. 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 summer. 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.
So without further ado, let's take a look at five "toxic stocks" you should be unloading.
2013 hasn't exactly been a banner year for Yamana Gold (AUY) -- or for other gold miners. As the precious metal fell like a gold brick, miners got hit even higher. At last count, Yamana's plunge measured 35% since the calendar flipped over to January -- and in spite of a bounce in yesterday's session, more downside look likely to AUY this week.
You don't need to be an expert technical analyst to figure out what's going on in shares of Yamana right now -- a quick look at the chart will do. Yamana has been in a downtrend channel since 2012, bouncing lower within a tight support and resistance range. That channel gives traders a high probability range for shares of Yamana to stay within. And today, as shares bump up against resistance, we're getting close to another sell signal in AUY. That sell signal comes when and if this stock bounces off of trendline support for a fourth time.
Other hard commodity companies are showing similar price action right now in spite of the fact the broad market is making its way higher. The whole sector is lagging right now. I'd recommend paring down your exposure if you don't want your portfolio performance to get dragged lower.
That bearish price action isn't relegated to commodity stocks right now, though . We're seeing the exact same setup in shares of Maximus (MMS), a mid-cap business process service provider. Maximus has been in a downtrend since the end of March, and like Yamana, the firm is testing its fourth bounce off of resistance this week.
Even though the downtrend in Maximus isn't quite as long-standing as the one in AUY, it's every bit as well defined. Every time the firm has attempted to push back into higher highs, shares have gotten swatted lower by sellers. And now, there's little reason to think that MMS will suddenly break out of its grind lower.
Momentum, measured by 14-day RSI, adds some extra evidence for extra downside in MMS; the 60-level in RSI has acted as a ceiling for the momentum gauge on the way down, stopping each test of trendline resistance that came before it. Now, with MMS' momentum reading just shy of 60, it's still squarely in downtrend mode.
Six Flags Entertainment
Not long ago, Six Flags Entertainment (SIX) was in an uptrend -- one that's contributed to a 16% rally in shares year-to-date. But just like gravity propelling a roller coaster at one of Six Flags' parks, this theme park operator looks much more likely to head downward from here.
Six Flags broke its original uptrend back in early June, falling through an important support level (Support 1 on the chart above) well ahead of the broad market's correction. And now, it's confirming a breakdown below the lower support level that it set back at the turn of the month.
Often, an aborted bullish setup is just as bad as (if not worse than) an outright bearish price pattern -- that's exactly what we're seeing in SIX. With shares making lower highs and lows since May, it makes sense to unload this toxic name before it falls further.
Taiwan Semiconductor (TSM) looks "toppy" right now. That's because shares of the $86 billion are at the tail-end of forming a long-term head and shoulders top pattern. As shares of TSM teeter in the edge in July, here's how to trade it.
The head and shoulders is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern's "neckline" level, which is right at $16.50 for TSM. A sustained drop below that $16.50 level is the major sell signal for this semi stock.
The head and shoulders pattern is one of the most popular price patterns -- and for good reason: 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." That's good reason to keep a very close eye on TSM from here.
It's been a stellar year for Disney (DIS) -- shares of the $116 billion firm have rallied more than 30% year-to-date, besting even the S&P's impressive climb this year. That's why it's so surprising that DIS is showing signs of a top from here. Mickey Mouse and friends have had no shortage of relative strength until now.
Disney is currently forming a double top, a price setup that's formed by two swing highs at the same level -- a move through $62 support signals that Disney is toxic and it's time to sell. That does mean that Disney's outcome isn't a foregone conclusion from here; a move above those $68 previous highs negates the downside setup.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Double tops, channels, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That support level at $62 was a price where there had been an excess of demand of shares; in other words, it's a place where buyers were more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes the breakdown below $62 so significant; the move indicates that sellers are finally strong enough to absorb all of the excess demand above that price level this week.
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.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji.