BALTIMORE (Stockpickr) – Just two dozen stocks. That's how many S&P 500 components actually ended the session higher -- and only seven of those managed a gain of 1% or better in Thursday's session. So no, Thursday wasn't a pretty day to be a stock market investor.
Instead, the big stock indices cratered yesterday, the S&P 500 ending about 2% lower than it started. For the tech-heavy Nasdaq Composite, losses came in worse than 2.8% on the day.
Volatility is creeping back into stocks this summer -- and that makes it all the more important to make sure you don't have too much exposure to "toxic" stocks in your portfolio. To find which stocks are showing cracks right now, we're turning to the charts for a technical look at five big stocks you don't want to own.
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 real estate investment trust WP Glimcher (WPG - Get Report). WP Glimcher has had a rough run so far in 2015, down about 23% since the calendar flipped to January. But the selloff might not be over yet. Shares of this $2.5 billion REIT are showing traders a bearish price pattern this summer.
WP Glimcher is currently forming a descending triangle pattern, a bearish continuation pattern that's formed by horizontal support down at $43 and downtrending resistance to the top side. Basically, as WP Glimcher bounces between those two price levels, it's been getting squeezed closer and closer to a breakdown below our $43 price floor. When that happens, you don't want to own this stock anymore.
Relative strength, which measures WP Glimcher's price performance vs. the broad market, has been looking rough all year long -- and it's not improving as shares test support. As long as that downtrend in relative strength stays intact, investors should expect more underperformance from this REIT.
Consolidated Communications Holdings
We're seeing the same price pattern right now in shares of small-cap telecom stock Consolidated Communications Holdings (CNSL - Get Report). Like WPG, Consolidated Communications is currently forming a long-term descending triangle setup, in this case with a support level down at $19.50.
If that $19.50 line in the sand gets violated, it's time to sell this stock.
Why all of that significance at that $19.50 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle pattern in Consolidated Communications, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Consolidated Communications' stock.
The $19.50 support level is a price where there has been an excess of demand for shares; in other words, it's a spot where buyers have previously been more eager to step in and buy than sellers have been to take gains. That's what makes a breakout below $19.50 so significant -- the move means that sellers are finally strong enough to absorb all of the excess demand at that price level.
Like with any breakout trade, it's important to be reactionary here. Downside in Consolidated Communications doesn't become a high-probability trade until sellers are able to knock this stock below our $19.50 support level.
Goodyear Tire & Rubber
Meanwhile, 2015 has been a good year for shares of tire maker Goodyear Tire & Rubber (GT - Get Report). This $9 billion company has climbed more than 9% since the start of this year -- and a whopping 58% if you zoom out to the lows that shares of Goodyear made as recently as last fall.
But investors might want to think about taking some gains off the table in Goodyear. This stock is starting to show some cracks this summer.
Goodyear is currently in the early stages of forming a double top pattern, a bearish reversal setup that looks just like it sounds. The double top is formed by a pair of swing highs that peak at approximately the same level. The sell signal comes on a violation of the trough that separates those two tops. For Goodyear, that's the $29 support level on the chart.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in Goodyear. Our momentum gauge has been in a downtrend since late April, making lower highs on both of the price peaks in Goodyear's price pattern. That's a bearish divergence that indicates buying pressure is weakening. If that $29 level gets violated, then it's time to sell.
Improving jobs numbers and the prospect of rising interest rates haven't been providing the shot in the arm for shares of outsourced HR firm Paychex (PAYX - Get Report) that many investors have been hoping for this summer. In fact, shares are off by about 8% since this stock peaked back in March.
The bad news is that shares could be headed even lower in the near-term, and it doesn't take an expert trader to figure out why.
Since March, Paychex has been bouncing its way lower in a well-defined downtrending channel. That price channel is formed by a pair of parallel trend lines that have done a good job of identifying this stock's high-probability range in recent months. Put simply, every test of the top of Paychex's price channel has been a great selling opportunity, and from here it makes sense to sell this week's bounce off of resistance.
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 Paychex. The downtrend in this stock is pretty shallow, but it's still pointed lower here.
Last up on our list of potentially toxic stocks is athletic apparel giant Nike (NKE - Get Report). Nike has been another major outperformer in 2015, rallying almost 17% since the calendar flipped to January. But this stock has started to look "toppy" since July. It becomes a sell if $112 gets violated.
Nike is currently forming a short-term head and shoulders pattern, a bearish reversal pattern that signals exhaustion among buyers. The 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 Nike's neckline -- that's at the $112 price tag.
This is another chart where momentum is adding extra downside evidence. 14-day RSI has made a series of lower highs lately, rolling over at the same time Nike's price action was forming the head and shoulders top. That's an indication that down days are outpacing up days in this stock.
Shares are close to our $112 level today. If that level gets violated, then Nike's longer-term 2015 uptrend is in jeopardy.