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5 Toxic Tech Stocks You Should Sell in March - views
BALTIMORE (Stockpickr) -- There’s no doubt about it: Take a glancing look at any chart of the broad market, and it’s clear that stocks are generally moving up.
But that’s exactly why you should pay attention to the stocks that are going down.
Make no mistake, relative weakness is toxic to your portfolio. The stocks that aren’t participating in the across-the-board equity rally are the ones that you need to think about unloading. And the ones that are looking outright bearish are the ones that you need to sell now. Today, we’ll take a look at five toxic stocks from the tech sector.
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 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.
So, without further ado, let's take a look at five "toxic stocks" you should be unloading in 2013.
It’s been an interesting year for Facebook (FB). While I’ve made it no secret that I’m not a big fan of the social networking stock, shares have posted some impressive performance in the short-term, climbing more than 21% in the last six months. If only that put a dent in the 30% that shares are still down from their IPO last summer.
Now, after its latest upward correction, Facebook is looking bearish again. That’s thanks to a head and shoulders top that’s been forming in shares since mid-November. The head and shoulders is a price pattern that indicates exhaustion among buyers. The pattern 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 right below $26.50.
In other words, it’s make or break time for Facebook right now -- this stock is perilously close to triggering a sell. It looks like we’ll see a rebound from yesterday’s dip in today’s session, which should spare shares from triggering Tuesday, but I’d still recommend keeping a very close eye on this name.
We’re seeing a similar setup right now in shares of video game maker Activision Blizzard (ATVI). Activision had been struggling lower, until a surprise in first quarter guidance sparked a huge gap up in shares. While investors should be excited about the 36% gains they’ve seen in 2013, there’s reason to believe this stock is headed lower.
That’s because, like Facebook, Activision Blizzard is currently forming a head and shoulders top pattern. The setup is in earlier stages than Facebook’s make-or-break pattern, but it’s still worth heeding with a neckline level at $14. If ATVI moves through $14, I’d recommend being a seller.
Momentum, measured by 14-day RSI, adds some extra downside confidence to this trade. The RSI uptrend in ATVI broke after shares completed forming their left shoulder, and the momentum gauge has been making lower highs since. Because momentum is a leading indicator of price, it makes sense to watch this name closely in March; its quick move upward in the first quarter could make for an equally quick move downward in the second.
Analog Devices (ADI) is another stock that’s looking “toppy” right now. Shares of the $14 billion chipmaker have been staging a respectable run since November, up more than 14%, versus around 10% for the S&P 500. But a double top pattern in shares puts the uptrend in question for March.
The double top is 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, currently right at $44.50. If shares slip below that price, we’ve got a sell signal for shares. With ADI trading just above that level this morning, here again is a potential for a quick trade signal this week.
If you do decide to take the trade in ADI, I’d recommend keeping a tight stop in place.
Sometimes the simplest patterns are the ones worth heeding the most. Case in point: the broken uptrend in Taiwan Semiconductor (TSM). You don’t have to be an expert technical analyst to figure out what’s going on in TSM -- this stock had been trading within an uptrending channel, but the channel broke back in February.
Trend channels are useful for traders because they identify the high-probability range for shares to keep moving within. Once shares move outside the channel, it’s an early warning that the direction of the trend is changing. That’s exactly what’s happening in TSM right now; shares broke down through trendline support, and after staging a pullback to re-affirm newfound resistance at the bottom of the channel, shares started trading within a downtrending channel.
Now, it makes sense to be a seller in TSM if you’re not already. This stock could have a lot more room to run lower in 2013. Worse, it could end up like the next name on our list.
Last up is South Korean telco KT (KT), a stock that looks a lot like the setup in Taiwan Semiconductor, albeit more developed. Like TSM, KT had been in an uptrend for much of the final two quarter of 2012, only to see its uptrend support line get broken back in December. Once that happened, sellers were definitively in control of shares.
And barring a bull trap back in January, this stock has continued to trade predictably within its new downtrending channel. If you’re looking for an opportunity to sell, now looks pretty good – shares are just coming off of a bounce off of trendline resistance, which means that they’ve got the furthest to move down the channel before catching a bid.
Here again, momentum adds some extra confirmation to this downside trade. RSI has been in a well-defined downtrend since well before KT’s price broke down, and until that RSI trendline gets broken, it’s unlikely we’ll see the downtrend in shares unwind. If you’re looking for an opportunity to jump into large-cap Asian names after the drama still unfolding in the Korean Peninsula plays out, one look at this chart reminds us that it’s clearly far too early to be a buyer here.
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.