BALTIMORE (Stockpickr) -- Buckle your seatbelt. The S&P 500 looks ready for another correction.
After rocketing straight up in February, the big index is sitting at the top of its trading range, an indication that we're due for some sideways price action in March. As far as the index is concerned, that's just fine; we're in a "buy the dips market" right now, so buyers should be eager for another dip.
The real trouble comes, though, when you hold onto "toxic stocks" during a correction. Those are the names that crush your portfolio's performance when the market takes a breather. That's why, today, we're taking a technical look at five "toxic stocks" you should start selling.
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 planning their stock execution.
So, without further ado, let's take a look at five toxic stocks you should be unloading.
First up is Legacy Reserves (LGCY), a $1.5 billion oil and gas partnership. This stock has been trading flat for the better part of the last year, failing to do much from a price standpoint while it paid out a hefty 8.8% dividend yield. But with a toxic setup in shares right now, chasing yield in LGCY looks like a major mistake.
That's because LGCY is currently forming a descending triangle, a bearish setup that's formed by a downtrending resistance level above shares and horizontal support at $26. Basically, as shares bounce between those two technically important price levels, they're getting squeezed closer and closer to a breakdown below that $26 price floor. When that happens, we've got our sell signal in LGCY.
It's important not to jump the gun on this trade. Downside doesn't become the high-probability move until shares violate $26.
Fidelity National Financial
Shareholders in $7.5 billion insurer Fidelity National Financial (FNF) have enjoyed a better run lately; in the last six months, shares have climbed 33% higher. But the rally could be coming to an end in FNF -- shares are starting to look "toppy" in March. Here's how to trade it.
FNF is currently forming a double top, a bearish reversal pattern that sounds just like it looks. The double top is formed by a pair of swing highs that max out at approximately the same price level. The sell signal comes when the trough that separates the two highs gets violated. For FNF, that breakdown level is right at $30. A drop below $30 means that it's time to be a seller (or go short).
There's no magic in why $30 is such an important price level to watch. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Triangles and double tops 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 shares.
That horizontal $30 support level in FNF 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. So if FNF slips below $30, more downside is the high-probability trade.
The last six months haven't been a good time to be an investor in $38 billion retailer Target (TGT). Between the firm's very public breach of credit card data by hackers and soft earnings, Target hasn't been able to catch a break on Wall Street. And if you think that's set to change, think again.
You don't have to be an expert technical analyst to figure out what's going on in Target -- a quick glance at the chart will do. Target is currently in a downtrending channel, a range that shares are likely to stay within. When it comes to price channels, it's about as simple as it gets: up is good and down is bad. And so, Target isn't looking very good right now. As shares bounce off of trend line resistance for a third time since last summer, it makes sense to be a seller here.
Target's relative strength has been horrific since last summer as well, a signal that TGT is likely to keep outperforming this month. As the broad market eyes a correction relative strength is the single most important indicator in your technical toolbox. That makes Target's lack of strength especially toxic.
Compania de Minas Buenaventura
We're seeing the exact same setup right now in mid-cap Peruvian gold and silver miner Compania de Minas Buenaventura (BVN). Like Target, Buenaventura has been stuck in a downtrending channel since last summer, bouncing lower on every test of trend line resistance. And so, with shares creeping up on resistance for a fourth time, it makes sense to sell the bounce lower.
Waiting to sell off a resistance bounce makes sense 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 ensuring that sellers are still in control before you unload your stake in BVN.
The fact that shares have had two other reversals inside the channel before even getting to resistance adds some confidence that buyers are few and far between in this name. So even though metals prices are on the upswing, don't expect Buenaventura to participate this time around.
Last up is Southwest Gas (SWX), a name that's starting to look toxic thanks to a classic technical setup that's been forming in shares since October. While shareholders have been sitting on double-digit gains since this summer, now might be the time to think about locking them in by selling. SWX looks "toppy" in March.
That's because SWX is forming a head and shoulders pattern, a bearish reversal setup that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal came on a move through the neckline just below $51. If that $51 level gets violated, it's time to steer clear of SWX.
Momentum, measured by 14-day RSI, has been making lower highs over the course of the pattern in SWX. In other words, our momentum gauge is telling us that down days are getting the better of up days in this stock, even as shares push up against highs. So, if shares can't catch a bid above $51, then it's time to sell.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.