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5 Toxic Stocks You Should Sell - views
BALTIMORE (Stockpickr) -- Don't be fooled by last week's bounce -- some stocks are still looking toxic right now.
Despite a big bounce last Wednesday, the S&P 500 is actually down 0.14% since the Fed announced that the taper caper was off. If the end to QE was really priced into the market, as so many said, then stocks sure aren't showing it. While the broad market still looks bullish overall, owning weak individual names is still a big liability in this market.
That's why we're taking a closer look at five "toxic" stocks you should sell today. Now. To be fair, the companies I'm talking about today aren't exactly "junk."
By that, 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.
Campus Crest Communities
2013 is panning out to be a rough year for Campus Crest Communities (CCG) -- shares of the small-cap student housing REIT have slid 12.7% since the calendar flipped over to January. While that sounds bad enough as it is, it's actually 31% underperformance vs. the S&P 500. And a quick glance at the chart makes it pretty clear to see why.
CCG is stuck in a textbook downtrend right now, bouncing between trendline resisatnce to the upside and a parallel support level below. You don't have to be an expert technical analyst to figure out where CCG's high probability price action is from here; it's down. Trendline resistance has acted as a ceiling for shares on the last four tests in 2013 and with shares hitting their head on that resistance level this week, now's the optimal time to sell (or short) this REIT.
If you're looking for an opportunity to buy CCG, you could be in for a long wait. But the 50-day moving average has been a pretty good proxy for resistance since the start of the summer. I'd recommend waiting for that line to get broken before even thinking about doing anything but selling this stock. Until then, it's toxic.
Nissan Motors (NSANY) has fared somewhat better this year -- at least the Japanese automaker is up year-to-date. But Nissan has still significantly underperformed the S&P since the start of the year -- and it's underperformed Japan's Nikkei 225 index by a much larger margin.
Now Nissan looks likely to drop. Here's why.
Nissan is currently forming a descending triangle pattern, a bearish setup that's formed by downtrending resistance above shares and horizontal support to the downside at $20. Basically, as Nissan bounces in between those two technical levels, it's getting squeezed closer and closer to a breakdown below that $20 support line. When that happens, look out below.
The setup in Nissan isn't exactly textbook. This stock spent the preceding months before the descending triangle pattern consolidating sideways, rather than slipping lower. But that doesn't change the trading implications of Nissan right now. If shares can't catch a bid at $20, it's time to sell.
Retail stocks have turned out some strong performance so far this year, and L Brands (LTD) has been no exception -- the $17 billion specialty retail name is up more than 26% since the calendar flipped over to January. But that's all in the past. Now, LTD looks "toppy."
L Brands is currently forming a double top, a price setup that's formed by two swing highs that peak at the same level. Those two tops happened in early August and then again in the middle of this month. A move through $56 is the signal that it's time to be a seller in LTD.
Momentum adds some extra evidence to downside in LTD. 14-day RSI had been in an uptrend for most of the year, but that uptrend broke when this stock made its first top in August. Since momentum is a leading indicator of price, that doesn't bode well for shareholders right now. Still, to avoid a false positive, I'd recommend waiting for $56 to get taken out before cutting LTD loose.
We're seeing the exact same setup in shares of Prudential Financial (PRU). Like L Brands, Prudential is forming a double top -- in this case with a breakdown level at $75. If that price gets violated, it's time to sell PRU.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Double tops, triangles, 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 $75 is 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 a breakdown below $75 so significant -- the move would indicate that sellers are finally strong enough to absorb all of the excess demand above that price level. That's why it makes sense to wait for that indication before you sell.
Last up is JPMorgan Chase (JPM), a stock that's showing traders a textbook reversal pattern right now. Financial sector stocks have benefitted in a big way from this rally all the way up. After all, in many ways, they're a lot like a leveraged bet on stocks. But a head and shoulders top pattern is decoupling JPM's price action from that of the broad market this month.
The head and shoulders pattern is a bearish reversal setup that indicates exhaustion among buyers. It's 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 above $50 at the moment for JPM. That's significant for a couple of reasons: It's a round number that's sure to get more attention from investors, and it's a price that acted as resistance on the way up back in March.
If you think that the head and shoulders is too popular 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." If you decide to short JPM on a move below $50, I'd still recommend keeping a protective stop at $54.
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