BALTIMORE (Stockpickr) -- Do you own one of these toxic stocks? Considering the fact that we're talking about almost a quarter trillion dollars in publicly traded equities, the chances might be higher than you think.
Put simply, some stocks just look "toxic" right now. And outperforming in this market is more about not owning the wrong stocks than it is about owning the right ones. That's why, today, we're taking a closer look at five toxic stocks to sell in May.
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.
Up first is fast food giant McDonald's (MCD). The Golden Arches have churning lately, down about 5% over the course of the last year. And while that may not seem like a lot at first glance, it actually means that McDonald's is underperforming the S&P 500 by a whopping 18% over that stretch. But shares could be headed even lower in the near-term.
MCD is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares (in this case between $95 and $96), and downtrending resistance to the upside. Basically, as MCD bounces between those two technically important price levels, it's been getting squeezed closer and closer to a big breakdown. $95 is the bottom-line level to watch in McDonald's. If $95 gets violated, look out below.
Relative strength at the bottom of the chart (not to be confused with RSI), is an extra red flag in MCD. That's because our relative strength line has been in a downtrend since last summer, an indication that this stock isn't just losing steam here, it's also still significantly underperforming the rest of the market in the long-term. If shares crack $95, a test of prior support at $87 looks likely.
Alaska Air Group
Airline stocks have been stellar performers over the last year, and Alaska Air Group (ALK) has been no exception -- this $8.4 billion air carrier has rallied almost 40% in the last 12 months alone. But investors might want to think about taking some gains off the table here; ALK is currently forming a descending triangle pattern just like the one in McDonald's. For Alaska Air, the breakdown level to watch is $62.50.
Why all of the significance at $62.50? 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 ALK's shares.
That $62.50 level in Alaska Air is a 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 -- it means that sellers are finally strong enough to absorb all of the excess demand at the at price level.
Keep a close eye on that $62.50 price in ALK. Once sellers knock out that level, a whole lot of downside risk opens up significantly.
$90 billion biotech stock Celgene (CELG) is another big name that's been a strong performer lately. While the broad S&P 500 index is up around 13% in the last year, CELG has more than quadrupled that performance, up about 57%. But CELG is starting to look "toppy" here, and holders could be about to give some of those gains back in the intermediate-term.
CELG is currently forming a rounding top, a price pattern that looks just like it sounds. The pattern indicates a gradual shift in control of shares of buyers to sellers, a handoff that becomes complete if shares violate support at $108. That $108 level is significant in Celgene. It previously acted as resistance back in November before flipping over and acting as support from December to today. If buyers can't hold shares above that level any longer, it's time to sell.
For short sellers who want to get in on the potential downside action once $108 breaks, it's a very good idea to keep a protective stop on the other side of the 50-day moving average -- that level started acting as a proxy for resistance lately.
Cliffs Natural Resources
Commodity-driven stocks have had a hard run lately, and small-cap iron ore and coal producer Cliffs Natural Resources (CLF) has been one of the hardest-hit. In the last year, this stock has lost almost 70% of its market valuation, tumbling from highs above $17 last May to five dollars and change today. The bad news is that the downtrend is still alive and well in this stock -- and you don't need to be an expert technical trader to see why.
The selling in CLF has been pretty orderly; this stock has spent the last year bouncing its way lower in a well-defined downtrending channel, swatted lower on every test of trend line resistance. In other words, every test of the top of CLF's price channel has been a great selling opportunity, and as shares bounce lower for a third time now, it makes sense to sell.
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 have the most to lose), and alternatively it's the spot where you'll get the first indication that the downtrend is ending (if shares can break above the top of the channel, the downtrend is over). 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 CLF.
Last up on the list is coatings manufacturer PPG Industries (PPG).
Since last fall, this stock has been slowly forming a classic topping pattern called a head and shoulders. This month, as shares flirt with a big break of the bottom of the channel, it makes sense to pay attention to potential downside in this $31 billion stock. Here's how to trade it.
PPG's head and shoulders pattern 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 comes on a move through PPG's neckline at $220. If that $220 level gets violated, look out below.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in PPG. Our momentum gauge has been in a downtrend since November, making lower highs on each of the three price peaks in PPG's head and shoulders. That's a bearish divergence that indicates buying pressure is weakening. If $220 gets broken, PPG becomes a sell.