Do You Own These 5 Toxic Stocks? Watch Out!

 

BALTIMORE (Stockpickr) -- Mr. Market has been in correction mode this month, a long overdue changeup in the trajectory for stocks. The last time the S&P 500 made a meaningful price correction was back in February.

So far, this correction is looking pretty meaningful. Since the calendar flipped to August, the S&P has shed 3.48% -- which means that, in just two weeks, the big index has returned approximately half of its performance year-to-date. But there's an important distinction between a correction and a crash. Even though stocks are retracing in August, the primary uptrend in the S&P 500 is very much intact right now.

The same can't be said for many of its individual components, though.

Right now, some of the biggest names on Wall Street are looking toxic. And there's a pretty good chance you even own one or two of them. That's why, today, we're taking a technical look at five toxic stocks 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.

LKQ

Auto parts maker LKQ (LKQ) hasn't exactly painted a pretty picture for investors year-to-date. Since the first trading session of 2014, shares of the $8 billion parts firm have slipped more than 21%. But that could just be the beginning. Here's why shares could be due for another leg lower in the second half of the year.

LKQ is currently forming a long-term descending triangle pattern, a bearish setup that's formed by horizontal support (down at $25) and downtrending resistance above shares. Basically, as LKQ has bounced in between those two important levels this year, it's been getting squeezed closer to a breakdown below that $25 price floor. When that happens, we've got our sell signal in shares.

The top of LKQ's price pattern has come in the form of a range, rather than a discrete level. For a sentiment shift big enough to unwind this bearish trade in LKQ, we'd need to see shares trade above the top of the range, currently at $28, before it was safe to be on the long side of this stock again. Otherwise, if $25 gets violated, look out below.

SL Green Realty

 

We're seeing another big breakdown trade in shares of $10 billion real estate investment trust SL Green Realty (SLG). Even though this stock has rallied hard this year, up more than 15% thanks to a flight to yield from earlier in 2014, shares are showing signs of a reversal this month.

SLG triggered a double top pattern at the start of this week, breaking down below key support at $108. The double top looks just like it sounds: It'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 $108 price floor in the case of SLG.

Why all of the significance at $108? 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 double top 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 $108 level in SLG 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. Caveat emptor.

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