BALTIMORE (Stockpickr) -- That's it: After the closing bell rings this afternoon, we'll have put to bed the first trading month of 2015. It probably goes without saying that we're not off to a particularly auspicious start. Since the calendar flipped to January, the big S&P 500 index has shed 1.83%.
But that stat doesn't tell the whole story of what's happening in the broad market right now. While stocks are experiencing a modest correction, generally speaking, it hasn't been hard to find individual names that have been getting pummeled lately. In other words, plenty of big-name stocks are looking "toxic" right now.
Owning these toxic stocks could do a number on your performance in 2015.
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 entry and exit points.
So without further ado, let's take a look at five toxic stocks you should be unloading (or shorting) in February.
Companhia Paranaense de Energia
We're starting small today. Up first is $3 billion Brazilian energy play Companhia Paranaense de Energia (ELP - Get Report) . Shares of ELP have had a rough run in recent months, down some 30% from their September highs. But shares look pointed even lower from here thanks to a pretty textbook continuation pattern that's been setting up in the stock.
ELP is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support below shares at $12 and a downtrending resistance line to the upside. Basically, as ELP bounces in between those two technically important levels, it's been getting squeezed closer to a breakdown below our $12 line in the sand. If that support level gets violated, then look out below.
Relative strength is our side indicator on the ELP trade. It's been making a downtrend of its own for the past several months, an indication that ELP isn't just moving lower, it's also underperforming the S&P 500 along the way. As long as that relative strength line keeps trending lower, ELP's underperformance will persist.
We're seeing the exact same price setup in $30 billion HVAC and auto parts supplier Johnson Controls (JCI - Get Report) . Just like ELP, shares of JCI are forming a descending triangle pattern, in this case with a horizontal support level at $45. That's the breakdown trigger price to watch for in JCI. If shares violate $45, then look out below.
Why all of the significance at $45? 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 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 JCI's shares.
That $45 level in Johnson Controls 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. If $45 gets violated in this stock, Johnson Controls is a sell.
Hewlett-Packard (HPQ - Get Report) is a big tech stock that's actually been a pretty solid performer in recent months. Since the middle of October, HPQ has rallied 17%, leaving the S&P 500's performance in its dust. But it's a little too early to celebrate the price action in HPQ here -- the rally is starting to show some cracks this week. Now might be a very good time to take some gains off the table.
Hewlett-Packard is currently forming a rounding top, a bearish reversal pattern that looks just like it sounds. The rounding top indicates a gradual shift in control of shares from buyers to sellers -- it's triggered by a breakdown below the base of the pattern. For H-P, that breakdown level to watch is support at $37. Shares are testing a breakdown below that level this week.
The planned breaking apart of H-P's businesses is adding some execution risk to shares this year, and that likely has a lot to do with the waning buying pressure in shares. Don't look for earnings to rescue HPQ here -- they don't get released until the end of next month. That said, the toxic setup in HPQ looks like a correction, not a crash. If $37 gets broken, then investors should expect a move down to $33.
Advance Auto Parts
Advance Auto Parts (AAP - Get Report) is another big stock that's starting to look "toppy" after a bullish run higher. AAP has rallied more than 38% in the last 12 months, beating the S&P's performance over that same stretch by more than triple. But shares are forming the early stages of a double top -- and investors should start thinking about taking some gains here before things turn toxic.
This is another price setup that looks just like it sounds: It's formed by a pair of swing highs that top out at approximately the same price level. The support level at $149 that separates those two peaks is the breakdown level to watch in shares of AAP. If $149 gets violated, then the uptrend in this big auto parts retailer is over.
Momentum, measured by 14-day RSI at the top of the chart, adds another red flag to the AAP trade. Our momentum gauge has been bleeding lower for the last two months now, even as Advance's share price has come up to retest prior highs. That's an indication that selling pressure is building in AAP. Remember, though, despite the sliding momentum, AAP isn't a high-probability sell until $149 gets broken.
Procter & Gamble
Last up is Procter & Gamble (PG - Get Report) , a huge consumer goods stock that's been in sell-mode for the last week and change. The selling in P&G didn't come as a surprise -- we looked at the toxic technical picture earlier this month. Since then, shares violated their neckline at $89, signaling a sell right before their big earnings-induced gap down.
Now the question is what happens next.
The minimum downside objective for P&G's head and shoulders top pattern was $85, a level that got achieved in yesterday's trading session. That doesn't mean that the selling is over, though. P&G's head and shoulders broke the uptrend that had been pushing shares higher on a relatively predictable basis. That makes lower levels likely as shares try to find the next semblance of buying pressure here.
For investors looking for a buying opportunity, the 50-day moving average is the level to watch. The 50-day has been a good proxy for P&G's price trend over the past year or so, and as long as Procter's stock is stuck below that line, the sellers are in control. PG still looks toxic here.
-- Written by Jonas Elmerraji in Baltimore.