BALTIMORE (Stockpickr) -- Portugal, the Middle East and earnings season, oh my! As investor anxiety ramps up to 11, the news cycle is taking its toll on the value of your portfolio. Already, this week weighs in as the four-biggest decline weeks in 2014 for the broad market.
And it's not even over yet.
There are plenty of factors weighing on stocks this week, but none are quite as clear-cut as the technical picture in the S&P 500. Put very simply, risk clearly eclipses reward in the S&P's price action right now, and stocks look due for a correction -- a more meaningful one than that 1% drop we've experienced since Monday.
But some names are due for a whole lot more than a correction this month. In fact, some stocks could be downright toxic to your portfolio's health this summer. Today, we're taking a technical look at five big names you should sell.
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.
Up first is Brazilian steelmaker Gerdau (<a href="http://stockpickr.com/symbol/GGB/">GGB</a>). 2014 hasn't exactly been kind to Gerdau, but then again, neither was 2013. Since the first trading session of last year, shares of the $10.6 billion firm are down 30%. For comparison, the S&P 500 is up 40% over that same stretch.
The bad news is that GGB looks primed for another leg lower, thanks to a textbook descending triangle setup that's been forming in shares since February. Gerdau's descending triangle is formed by horizontal support below shares at $5.80 and downtrending resistance to the topside. The sell signal comes on the next crack below that $5.80 price floor.
Why all of the significance at $5.80? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns such as 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 shares.
That horizontal $5.80 level in Gerdau 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. Keep a close eye on $5.80 this week.
French telecom company Orange (<a href="http://stockpickr.com/symbol/ORAN/">ORAN</a>) has posted some more impressive numbers in 2014: since the calendar flipped to January, shares of the $40 billion phone carrier have rallied 25%. But that could be about to change. Orange is looking "toppy" as we head deeper into the summer.
Orange is currently forming a head and shoulders top, a setup that indicates exhaustion among buyers. The setup 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 ORAN's neckline at $15.50, a level that got taken out earlier in the week. Orange has already broken through its neckline, but the move has been slow enough that there's still time to sell (or short) from here.
Momentum, measured by 14-day RSI, provides some confirmation of the downside in ORAN. Over the course of the head and shoulders, momentum has been making lower highs and bleeding off. That's a big red flag.
American Airlines (<a href="http://stockpickr.com/symbol/AAL/">AAL</a>) is another name that's showing traders a head and shoulders pattern this week, with one big difference: the setup in AAL isn't as far along. After rallying 70% in 2014, AAL is starting to show some cracks this summer. At this point, shares are in the process of forming a right shoulder, the final step before a test of the neckline at $39.50. If AAL falls through that $39.50 level, it's time to be a seller.
American's breakneck momentum so far this year could be a big problem for longs if shares do in fact violate their neckline at $39.50. AAL's pattern puts a minimum measuring objective at $34, a 14% decline from that breakdown level. But because of the extended upside, shares could continue their way down before finding meaningful support.
Downside isn't a foregone conclusion in AAL. Until shares violate that neckline level, this stock is still catching a bid. The bearish pattern gets invalidated on a move above $45.
Small-cap home DVR-maker TiVo (<a href="http://stockpickr.com/symbol/TIVO/">TIVO</a>) looks toxic right now, and you don't need to be an expert technical trader to figure out why. TIVO is bouncing its way lower in a well-defined downtrending channel, a trading range that's identified by a pair of parallel trend lines. Put simply, those lines identify the high-probability range for shares of TIVO to trade within -- and they're pointed lower from here.
The downtrend in TIVO is nothing new. In fact, it's been in force since back in October, when shares hit their head on resistance at $14.25. What's notable, though, is the strength of trend line resistance and the width of the channel – shares' attempts to test resistance have been few and far between, and every one of them has been swatted down quickly by a glut of selling pressure. Likewise, the width of the channel is large; that means that shares can fall materially without exiting their range, an unwelcome characteristic for longs.
Shares are pressing up against resistance this week. sell the next bounce lower.
Last up on our list of toxic names is IntercontinentalExchange (ICE), the financial firm that owns a collection of financial exchanges and clearing houses -- including the NYSE. 2014 hasn't been a good year to own ICE: shares of the exchange giant are down nearly 19% year-to-date. And it's not showing signs of getting any better.
Like TIVO, ICE is forming a downtrending channel. It makes sense to be a seller on the bounces off of trend line support. Waiting for that move down 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 ICE.
We're seeing selling pressure confirmed by relative strength in ICE right now. The relative strength ling rolled over in 2014, when shares started underperforming the broad market. Since relative strength is statistically a very good predictor of price action on a rolling three-to-ten month time horizon, it's a red flag worth heeding from here.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.