BALTIMORE (Stockpickr) -- A handful of unlikely stocks could be toxic for your portfolio right now.
I'm not talking about the obvious names -- the ones grabbing the headlines with negative news or the ones with the heftiest short interest. Instead, these stocks are otherwise unassuming. That's what makes them so dangerous to own right now.
Mr. Market has been enjoying a hefty rally since the start of June 2012, climbing 10.4% since equities found their bottom. Just to be clear, that's a rally of pretty massive proportions for a three-month span. And the stocks that aren't participating in the rally are sending a warning signal to investors; so are the ones that have already used up all of their buying pressure. Today, we'll take a technical look at five toxic names that fit those two conditions.
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.
For the unfamiliar,
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
you should be unloading in September.
First up is
, the $14 billion auto parts retailer. AutoZone has had a solid year in 2012, churning out gains of nearly 13% since the start of the year, but now shares are pointing lower.
Here's why this stock is toxic in September.
AutoZone is currently forming a descending triangle pattern, a setup that's formed by downtrending resistance and a horizontal support level below it. Essentially, as shares bounce in between those two price levels, they're getting squeezed closer and closer to a breakdown below that $355 support level. When that happens, traders have a short signal.
In real terms, the best way to think of that
is that it's a price below which there's a glut of demand for shares; eventually, that demand is going to get absorbed by the increasing selling pressure that's causing the downtrending resistance overhead. When that happens, and AZO can't catch a bid at $355, you don't want to be left holding the bag.
adds some confidence to the downside implications of this pattern: 14-day RSI has been trending lower since late February, when this stock turned over. Since momentum is a leading indicator of price, that's an added signal that AZO is headed lower.
It's a similar situation for electric utility
right now. The firm has been rallying for much of 2012, but now this stock is looking very toppy. That's thanks to a double top pattern that's forming in shares.
In short, a double top is a bearish pattern that's formed when a stock makes two tops at approximately the same level, in this case at $48. The trough that separates those two tops is the "breakdown level" -- a move below that price signals longs to exit and more risk-hungry investors to go short. SO's setup is basically textbook.
Shares have been consolidating right around their breakdown level for the past few market sessions, as buyers try to bid shares higher. Since SO is printing above $46, it's clear that this stock can still catch a bid, but let's not forget that it's exhausting much of its supply of buyers here at the same time that sellers are more than happy to take gains before SO moves from positive to negative territory for the year.
I'd recommend jumping out of this stock here.
is another power utility that's looking toppy right now. Despite what looks like a strong chart, Edison is only up around 5.3% since the first trading day of January, underperformance that's likely to be at the top of shareholders' minds as this stock turns over.
Edison's chart pattern is pretty straightforward: It's a rounding top. The rounding top is just what it sounds like, a gradual rollover in shares from an uptrend to a downtrend. The pattern indicates a slow shift in control from buyers to sellers. The fact that EIX's dashed uptrend line got broken this month adds some extra evidence to the downside potential of this setup.
The fact that a support level in RSI (at the top of the chart) got broken is negative for shareholders as well. Remember, momentum is a leading indicator of price, so a break in support for RSI means that EIX is dropping at a faster rate than before. I'd be a seller here.
Things have been better for $223 billion Chinese oil giant
. Shares of the massive supermajor have been trending lower essentially since the start of the year, mirroring the slide in oil prices that we saw in early 2012. But when oil rebounded at the start of the summer, PTR didn't, indicating that this stock was having serious trouble catching a bid.
Since March, shares have been bouncing lower in a downtrending channel, a setup that gives traders a peek at the high-probability outcomes for PTR. The fact that PTR has bounced off of support and resistance so dutifully lends extra importance to those price lines -- and now, with shares pushing lower off of resistance, it's a logical time to get away from shares. After all,
is the likely price target for this stock; it has been the last couple of times shares touched resistance, anyway.
Traders can ignore the plethora of
in PetroChina's price chart. They're suspension gaps caused by trading overseas when U.S. markets are closed. They don't have any technical implications for shares.
is looking nearly identical right now, with shares bouncing lower in a downtrending channel of their own. The unique thing about Barrick is the fact that it's slipping lower at the same time many other gold miners are bottoming and looking attractive. The lower lows in ABX should be sending investors an important signal here: Sellers are clearly in control of this stock.
As with PTR, Barrick's shares are testing resistance right now. The past few times ABX tested trendline resistance, the outcome was a push back down to ever-lower levels of trendline support. Unless shares break outside of the channel, ABX is likely to do the same thing this time around.
If you want exposure to gold miners right now, other setups (like the
(GG) setup I pointed in "
") look less ugly.
To see this week's trades in action, check out the
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji is the editor and portfolio manager of the
Rhino Stock Report
, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including
, and has been featured in
Investor's Business Daily