BALTIMORE ( Stockpickr) -- Your favorite tech stocks are waving the yellow caution flag right now. As we dig deeper into the inaugural earnings season for 2014, it makes a whole lot of sense to heed those warnings.
I've said before that I think we're in store for a correction in stocks. And after out-earning the rest of the S&P 500 over the last six months, the technology sector is starting to show some of the first cracks.
If tech rolls over first, then everyone's favorite names are suddenly going to get pretty toxic for investors' returns this year.
To be clear, these five names aren't exactly next up in line at bankruptcy court. But that's irrelevant; from a technical analysis standpoint, they're some of the worst positioned names out there right now. For that reason, fundamental investors who already own shares need to decide how long they're willing to take the pain if they want to hold on. 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.
First up is ASML Holding (ASML), the $40 billion semiconductor supplier that's managed to turn out some of the best performance in the semi space in the last 12 months. Shares of ASML are 38% higher this morning than they were a year ago, but that's going to be cold comfort for investors who've been buying shares recently. ASML looks primed for a drop in the near-term.
That's because ASML is currently forming a descending triangle, a bearish setup that's formed by horizontal support below shares down at $87.50 and downtrending resistance to the top-side. Basically, as ASML bounces in between those two price levels, it's getting squeezed closer and closer to a breakdown below support. When that happens, we've got our sell signal.
Relative strength adds some extra confirmation to downside in ASML. Shares have been dramatically underperforming the broad market since October, an indication that historically leads to more underperformance in the intermediate term. And with the S&P in corrective mode right now, relative strength is the single most important indicator you can have in your toolbox right now.
With RS pointed lower, it makes sense to avoid ASML in January.
While Mexico-based telco giant America Movil (AMX) isn't really a pure-play tech name as such, it's certainly been trading like one recently. And that's not a good thing. With a bearish setup in shares that's triggering as I write, AMX looks "toppy" right now. Here's how to trade it.
The pattern to watch in AMX is a "double top." Like the name suggests, the setup is formed by two swing highs that lose steam at approximately the same level. The sell signal came on a move through support at $22. AMX has been flirting with that $22 level ever since, but it's squarely below it. That means that it's time to sell (or short) this Latin American carrier.
Whenever youre looking at any technical price pattern, its critical to think in terms of those buyers and sellers. Double tops, triangles and other pattern names are a good quick way to explain whats going on in a stock, but theyre not the reason its tradable. Instead, it all comes down to supply and demand for shares.
That support level at $22 is a price where there has been an excess of demand of shares; in other words, its a place where buyers had been more eager to step in and buy shares at a lower price than sellers were to sell. Thats what makes the breakdown below $22 so significant -- the move told us that sellers are finally strong enough to absorb all of the excess demand at that price level.
You don't have to be an expert technical analyst to figure out what's going on in shares of IP networking giant Cisco Systems (CSCO) this chart looks pretty ugly right now.
Cisco is currently forming a downtrending channel, a price setup that's formed by a pair of parallel trendlines bounding CSCO's share price movement. When it comes to price channels, it's about as simple as it gets: up is good and down is bad. So now, as CSCO bumps its head on trendline resistance, shares look ready for another leg lower.
Here again, relative strength looks horrendous. In the past year, Cisco has underperformed the S&P by around 21 percentage points, missing the mark by a wide enough margin to send investors selling on every attempt higher. That's exactly why that stock has been swatted down like clockwork at trendline resistance.
That doesn't guarantee that Cisco is headed lower from here. After all, all trendlines do eventually break. Instead, wait for a bounce off of trendline support before selling CSCO. The bounce lower tells us that sellers are still in force at the top of the channel.
Even good ol' Google (GOOG) isn't immune from the weakness in the tech sector this month. Yes, despite doubling (or perhaps because of it), the search engine giant is starting to look "toppy" thanks to a classic technical pattern that's been forming in shares.
Google is currently forming a head and shoulders top, a bearish reversal setup that indicates exhaustion among buyers. The setup 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, which is right at $1100 at the moment for GOOG. If this stock can't bounce at $1100, it's time to be a seller. A negative divergence in RSI (a momentum gauge not to be confused with relative strength) adds fuel to the fire.
The good news for Googlers is the fact that the relatively small size of the pattern indicates that this is just a correction, not an outright change of trend. The downside target for the trade is $1070. If shares bounce off of that price level, it should be a good entry point for longs.
We're seeing the exact same setup in shares of Taiwan Semiconductor (TSM) right now, but with two big differences: The downside implications are much bigger in TSM, and the trade has already triggered. The neckline in TSM is $17, a price that got taken out at the end of last week.
Since then, shares have pulled back to retest that $17 level. To a lot of investors, that looks like a sign of strength, but in reality it's not. If shares get batted down again at newfound $17 resistance, then there's no question that sellers are in control of TSM's shares. So while the pullback isn't a silver lining for bulls, it is a second-chance at a low-risk entry for short sellers.
Lest you think that the head and shoulders is too well known 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."
Thats good reason to keep an eye on Google and Taiwan Semiconductor in the market sessions ahead.
To see this weeks trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.