BALTIMORE (Stockpickr) -- When it comes to the stock market, looks can be deceiving.
For instance, even though the S&P 500 is up more than 10% since the beginning of 2014, nearly one-in-three S&P components is actually down on the year. Ditto for the Dow. Move down the scale to small-caps, and even though the Russell 2000 index is up slightly year-to-date, more than half of the stocks in the index are down. Put simply, stock selection still matters in this market.
I'm not just talking about picking the right stocks -- avoiding the wrong stocks is just as important. And the stats show that it's been easy to pick the wrong stocks this year. But that doesn't mean you need to keep them…
Today, we're taking a closer technical look at five new charts 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.
So, without further ado, let's take a look at five "toxic stocks" you should be unloading.
First up is Wall Street darling GoPro (GPRO) , a name that's been on a tear since it had its IPO in the mid-summer -- shares of the action camera maker are up 144% since their first print. But despite the post-IPO buying frenzy, GoPro is starting to look "toppy" this fall. Here's how to trade it…
GoPro is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support down at $65, and downtrending resistance above shares. Basically, as GPRO bounces in between those two technically important price levels, it's getting squeezed closer to a breakdown below our $65 price floor. When that happens, we've got our sell signal.
The nail isn't in the coffin quite yet in GPRO -- if shares can manage to break out of their descending triangle pattern to the topside, the bearish implications are over (in fact, an aborted bearish pattern is often a stronger buy signal than an outright bullish one). But the descending triangle that's forming as this stock's first real price pattern is a very noticeable red flag for buyers. I'd be a seller on a violation of $65 support.
iShares China Large Cap ETF
We're seeing the exact same price setup in shares of the iShares China Large-Cap ETF (FXI) . This $5.6 billion exchange traded fund is the best investible proxy for "Chinese stocks" as far as American investors are concerned -- and it's been a good bet lately. Over the past six months, this ETF has climbed 12% higher. But just like with GoPro, a descending triangle is a big red flag here. The sell signal in FXI comes on a breakdown below support at $38.
Actually, that $38 price floor hasn't been quite so hard and fast in shares of FXI -- instead that support level is actually a range between $37.50 and $38. From a practical standpoint, that just means that it's important not to use hard stops if you own FXI. Shares can violate $38 intraday without tripping a sell signal.
But nevertheless, it's important to keep a tight reign on shares. That's because the intermediate-term setup of this price pattern comes with similar-sized consequences to the downside when it triggers. Look for $34 as the next stopping point on the way down.
Lloyds Banking Group
The good news is that you don't need to be an expert technical trader to figure out what's going on in shares of Lloyds Banking Group (LYG) -- a quick glance at the chart should tell you everything you need to know. Lloyds is bouncing its way lower in a textbook downtrending channel, a setup that has this London-based financial name looking at lower ground by year-end.
The downtrend in LYG is formed by a pair of parallel trendlines that identify the high-probability range for shares of this stock to stay within. In other words, every successive test of trendline resistance on the way down has provided a high-probability selling opportunity, and as LYG backs off of that level for a seventh time since this summer, it makes sense to be a seller here.
Relative strength adds another red flag to the setup in Lloyds. This stock's relative strength line is trendline down just like its price, which means that LYG is underperforming the broad market. As long as the downtrend in relative strength remains intact, LYG's underperformance should continue.
Sprint Corp. (S) is another stock stuck in an ugly downtrend. Actually, Sprint began looking somewhat positive just a few weeks ago, but an awful earnings miss scrubbed any chance of that happening -- instead, shares kept bouncing their way lower. So, with the latest test of resistance swatted down at the start of this month, it makes sense to sell the bounce.
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 Sprint.
The 50-day moving average has been a good proxy for resistance since this summer -- if you like Sprint here for fundamental reasons, wait for the 50-day to get taken out before you think about buying. Until then, the downtrend is very much intact.
Enbridge Energy Partners
Last up is Enbridge Energy Partners (EEP) , a name that's actually been a stellar performer so far in 2014: shares of this $12 billion midstream energy company are up 23% since the start of the year. Investors might want to think about taking gains here. That's because EEP has been forming a classic head and shoulders top for the past few months, a setup that sends a sell signal if $32 support gets violated.
Why all of the significance at $32? 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 head and shoulders 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 EEP's shares.
That $32 level in Enbridge 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, EEP doesn't officially become toxic until $32 gets violated.
Momentum is the side-indicator to watch in this stock: 14-day RSI has been making lower highs since June, even while EEP's share price made higher levels during the pattern's head. Our momentum gauge tells us that selling pressure is still mounting in this stock.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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 that 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