BALTIMORE (Stockpickr) -- The S&P 500 and the Dow made new closing highs yesterday, but don't let that fool you into thinking everything that markets are in "up, up, and away mode." Stock selection matters more than ever in 2014, and that's not likely to change with the calendar in the next few months.
Even though the S&P 500 Index is up double digits year-to-date, nearly a third of the individual stocks in the S&P 500 are actually down this year. It's the exact same story in the Dow. In other words, it hasn't been hard to own stocks that are toxic to your portfolio in 2014.
Today, we're taking a closer technical look at five new names that are looking "toxic" this fall.
Just to be clear, 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, sellers are shoving around these toxic stocks 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 in the weeks and months ahead. 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
So, without further ado, let's take a look at five "toxic stocks" you should be unloading.
Up first is $93 billion pharmaceutical firm AstraZeneca (AZN) - Get Report . AstraZeneca has been a stellar performer so far in 2014, rallying more that 22% since the calendar flipped to January. But that long streak of outperformance is starting to show some cracks this fall. Now, a bearish price pattern is threatening a drop in shares of AZN.
AstraZeneca is currently forming a descending triangle, a bearish price setup that's formed by horizontal support to the downside at $67.50 and downtrending resistance above shares. Basically, as AZN bounces in between those two technically significant price levels, it's getting squeezed closer to that $67.50 support line. If that level gets broken, then AZN is open to a lot more downside risk. This is a long-term price setup, and that means it comes with equally long-term trading implications if and when the breakdown does happen.
Relative strength adds another red flag to the setup in AstraZeneca. This stock's relative strength line broke its uptrend back in the summer, which means that AZN has been underperforming the S&P ever since. As long as the downtrend in relative strength remains intact, AZN's underperformance should continue.
We're seeing the exact same setup in shares of DigitalGlobe Inc. (DGI) -- the big difference is that DGI didn't have the same outperformance to start the year that AstraZeneca did. Like AZN, DigitalGlobe is forming a descending triangle pattern, in this case with support down at $26.50 – if that $26.50 line in the sand gets violated, then DGI becomes a sell.
Why all of the significance at $26.50? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns like the descending triangle are a good way to quickly describe 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 DGI's shares.
That $26.50 level in DigitalGlobe is the spot where there's previously been an excess of demand for shares; in other words, it's a price where buyers have been more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below support so significant – the move means that sellers are finally strong enough to absorb all of the excess demand at the at price level. Still, DGI doesn't officially become toxic until $26.50 gets violated.
$23 billion Indonesian telco PTTelekom Indonesia (TLK) - Get Report is a stock that's starting to look "toppy" after a solid run for most of 2014. While shares are up more than 22% since the beginning of the year, now looks like a good time to think about taking gains thanks to a classic rounding top in shares. Here's how to trade it:
The rounding top in TLK looks just like it sounds. It indicates a gradual shift in control of shares of buyers to sellers, a handoff that becomes complete if shares violate support at $44. That $44 level is significant in TLK – it previously acted as resistance back in May before flipping over and acting as support from July to today. If buyers can't hold shares above that level, it's time to sell.
There are some macro factors in play for TLK. A strengthening dollar (as Japan launches more aggressive quantitative easing efforts and commodity prices crumble) is a major component of this stock's recent water-treading. TLK isn't out of the woods unless it can resume its uptrend with a close above $49.
Healthcare facility operator HCA Holdings (HCA) - Get Report is another name that's starting to look "toppy" this fall. And at a glance, the price action in HCA isn't all that far removed from what we're seeing in TLK – the uptrend is rolling over, and shares are testing a key support level at $65 this month.
The double top in HCA is a bearish reversal trade that's formed by a pair of swing highs that top out at approximately the same price level. The sell signal comes on a violation of the support level that separates the tops, that $65 support level I mentioned a moment ago. If shares break down below that most recent swing low, then we're seeing a major change in trend.
Momentum offers some extra confirmation of a downward move: 14-day RSI has been making lower highs since September, even while HCA's price action was re-testing $74. That's an indication that selling pressure is still mounting in HCA. Since momentum is a leading indicator of price, HCA is a name that's best avoided here.
Fifth Third Bancorp
Last up is Fifth Third Bancorp (FITB) - Get Report , a regional bank that's done a whole lot of nothing for investors so far this year. The good news is that you don't need to be an expert technical trader to figure out what's going on in FITB – a quick glance at this stock should tell you everything you need to know.
Shares of FITB have been bouncing their way lower in a well-defined downtrend, moving in between a pair of parallel trendlines that have marked the high-probability range for shares to stay within. Those four previous tests of resistance have provided pretty predictable selling opportunities for shares of FITB all the way down. If you're looking for a chance to get out on test number five, it makes sense to wait for the next bounce lower before you sell.
Waiting for that bounce lower before clicking "sell" is a critical part of risk management for two big reasons: it's the spot where prices are the highest within the channel, and alternatively it's the spot where you'll get the first indication that the downtrend is ending. Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're confirming that sellers are still in control before you unload shares of FITB.
Sell the first sign of weakness in this $17 billion bank.
-- Written by Jonas Elmerraji in Baltimore.
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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.
Follow Jonas on Twitter @JonasElmerraji
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.