Stock Quotes in this Article: MHO, NOK, NUS, TLLP, BBRY

 

BALTIMORE (Stockpickr) -- Are you poisoning your portfolio? If you own these five toxic names, you may be.

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.

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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 "toxic stocks" you should be unloading in 2013.

BlackBerry

Don’t let yesterday’s price action (or the new ticker symbol, changed from Research In Motion's RIMM) fool you, BlackBerry (BBRY) is still the same stock it was last week. The $6.8 billion cell phone maker spent most of the last year in a downtrend, dropping like a rock as competing handsets shoveled market share away from the firm. And even though the oversold stock bounced hard in the last quarter, it still looks toxic at this point.

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That’s because BBRY is currently in the early stages of forming a head and shoulders top, a price pattern that indicates exhaustion among buyers. 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, currently at $11.50.

Momentum, measured by 14-day RSI, had been in an uptrend following this stock’s lows back in the Fall -- but that uptrend broke at the turn of the new year. Now momentum is trending lower. Since RSI is a leading indicator of price, that doesn’t bode well for BBRY. This is still a volatile stock, and it’s likely we’ll see big swings in both directions for a while now; if the neckline gets broken, though, look out below.

Nokia

We’re seeing the exact same setup in another cellular phone stock: Nokia (NOK).

Like BBRY, Nokia spent much of 2012 crashing, only bouncing back in the last quarter after shares got too oversold. An identical pattern is in play in Nokia; the stock is a head and shoulders top, in this case with a neckline at $3.80. A breakdown below that price level is the sell (or short) signal for this phone maker. Here again, a breakdown in momentum adds some extra confirmation to a short-side setup in this stock.

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Even though the right shoulder hasn’t formed in either of these two names, the trading implications remain the same. If $3.80 gets broken here before a right shoulder has a chance to form, I’d still be a seller.

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.”

Tesoro Logistics

Oil logistics firm Tesoro Logistics (TLLP) has built up an enviable business moving energy commodities around the country -- but for now, its stock price looks at risk of a big breakdown. Here’s what to look for in this small-cap dividend payer.

Tesoro is forming a descending triangle, a bearish pattern that’s formed by downtrending resistance above shares and horizontal support below them. Essentially, as TLLP bounces in between those two technical levels, it’s getting squeezed closer and closer to a breakdown below support at $42. When that breakdown happens, it’s time to flee from shares of TLLP.

With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, head and shoulders patterns and the like are a good way of describing what’s happening on a chart, but they’re not the reason why it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.

The horizontal support level at $42 is a place where a glut of buyers has been willing to step in and put a floor in the stock. A breakdown would mean that increasingly eager sellers have absorbed all of the excess demand of shares sitting at that level -- and without that floor in place, shares could fall much further than that.

That’s why it makes sense to sell TLLP on a push through $42.

M/I Homes

The past year has been a stellar time to own homebuilders. Some of the biggest stock gains of 2012 came from homebuilding stocks -- and early in 2013, the trend looks likely to continue. But not for M/I Homes (MHO).

To be clear, MHO has participated in the homebuilder rally, climbing more than 86% in the last 12 months. More important, those gains have been built in an uptrending channel, a tight trading range that makes MHO’s price action much more predictable. The problem for shareholders is that this stock broke down below trend line support in yesterday’s session; the inability to catch a bid at support is a big deal for a stock in an uptrend.

Even though other home stocks are correcting this week, none saw as big (or technically significant) a fall as the one in MHO. That’s a big signal to equity investors that the gravy train is slowing down in for shares in February.

Unless buyers wake up and this stock manages to recapture its uptrend later today, I’d recommend exiting MHO here.

Nu Skin Enterprises

Last up on our list of “toxic” names is mid-cap cosmetics company Nu Skin Enterprises (NUS). This stock has been making the exact opposite setup that MHO just exited from -- it’s spent the majority of the last year in a downtrending channel.

Now shares are falling back off of resistance, the spot where a glut of selling pressure has been collecting. That has been implications for investors right now, given that this stock has moved down to test support after each of the last four tests of resistance.

With support considerably below NUS’ current share price, that exposes shareholders to some big risks. I’d recommend getting out of shares before they fall further.

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.

RELATED LINKS:

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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.