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TheStreet Open House

5 Toxic Stocks You Should Sell

Stocks in this article: JPMLTDNSANYPRUCCG

JPMorgan Chase

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.

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Follow Stockpickr on Twitter and become a fan on Facebook.

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

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