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5 Toxic Stocks You Need to Sell - views
BALTIMORE (Stockpickr) -- "Toxic" is probably the best word to describe the broad market's price action over the past few trading sessions. The big indices fell through support at their respective 50-day moving averages last week, and the best advice has been "look out below" ever since.
The S&P 500, for instance, has shed close to 4% since the Fed's statement was released last Wednesday. That's the worst reaction to Ben Bernanke and company since all the way back in 2011. And at first glance, it looks like it could be just the beginning.
But as usual, not all stocks are telling the same story right now. While some names have taken a definite corrective posture in late June, others look downright toxic to your portfolio right now. 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 before the summer doldrums take hold.
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.
Normally, utility stocks are a bastion of safety when times get markets get rough. But that doesn't look like it's the case with power company ITC Holdings (ITC) right now. Instead, ITC is showing investors a bearish bias. Here's how to trade it.
ITC is currently forming a descending triangle pattern, a bearish setup that's formed by a downtrending resistance level above shares and horizontal support to the downside. Basically, as ITC bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakdown below support at $86. Don't let yesterday's relative strength in ITC fool you; sellers are clearly in control at higher levels.
The sell signal comes on the breakdown below that $86 support level. That's the signal that this stock's unable to catch a bid at a price that's previously acted as a sort of floor for shares. If you decide to actually go short on the move through $86, I'd recommend keeping a protective stop right at the 50-day moving average.
That's more or less what's happening right now in insurance giant AIG (AIG). We last looked at the rectangle pattern forming in shares AIG back in early June, when the broad market was still inside its trend channel. Clearly, that's no longer the case.
AIG broke down below $43 in yesterday's session, sparking a sell signal for shares. While the relatively tight range of AIG's triangle means that downside is likely to be pretty contained, there's still a while to go before AIG hits support around $39.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles, rectangles 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 $43 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 $43 so significant. The move indicates that sellers are finally strong enough to absorb all of the excess demand above that price level this week.
Web giant Yahoo! (YHOO) has had a tumultuous run over the last year and change, but distill the $27 billion digital media company's price action just to 2013, and this stock has been in an orderly uptrend along side the broad market. Year-to-date, shares of YHOO have climbed around 22%. But it shouldn't come was a huge surprise that when the uptrend broke in the S&P, it fell even harder in Yahoo! last week.
It doesn't take an expert technical analyst to figure out what's going on in YHOO -- a glance at this stock's chart will do. YHOO's trendline support level acted as a springboard for shares all the way up, but once it gave out in last week's trading, it sparked a major selloff in shares. At this point, it's unclear where the selling in YHOO will end, but I'd stay away from the long-side until the new downtrend resistance line gets taken out.
Momentum, measured by 14-day RSI, adds some extra evidence to Yahoo's change-in-trend. RSI had been bouncing above 50 when shares were in bull market mode, but the momentum gauge broke down below that level last week. Since momentum is a leading indicator of price, that points to lower ground in YHOO.
We're seeing the exact same situation in shares of consulting firm Accenture (ACN) right now. The price action in Accenture isn't quite as volatile, but it's every bit as tradable thanks to the breakdown in shares that happened in Friday's session.
Just like Yahoo! and the S&P, Accenture spent most of 2013 bouncing higher in an uptrending channel. At the time, that channel represented the high-probability trading range for shares. But all trends eventually break -- and that's what happened in ACN. Now, with lower highs and lows in place, shares look likely to move lower this summer.
The tight trading in Friday and Monday's sessions indicate that buyers have been trying harder to hold onto their positions in shares of Accenture. Even so, the newfound abundance of supply of shares at the 50-day moving average makes the high-probability outcome to the downside from here.
Last up is defense contractor Raytheon (RTN), a stock that's looking "toppy" right now.
Raytheon is currently forming a double-top pattern, a setup that's formed by two swing highs that hit their heads at approximately the same price level. The sell signal comes on a breakdown below the near-term support level for shares, which is right at $65. Shares are sitting just above that price level this morning. If you own RTN right now, consider a crack below $65 to be your sell signal.
Raytheon practically went parabolic in late April, so it's not a huge surprise that this stock is looking primed to correct harder than the rest of the market. Once saving grace for this stock is the fact that the relatively short pattern height in RTN gives it a less painful downside target at $62. If you're looking to enter a long in this stock, that's where I'd look to be a buyer again.
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
Follow Jonas on Twitter @JonasElmerraji