BALTIMORE (Stockpickr) -- Thursday's price action was ugly. The Fed's latest PR initiative did one thing really well: It torpedoed U.S. markets. By the time the closing bell rang, the S&P 500 was down at 1,928 and change, 2.07% lower on the day. As I said yesterday, volatility is back in a big way.
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Depending on the stocks you own, the big drop in the big indices could be small potatoes. The broad market's price action this year has dramatically underplayed the extent of the decline in many of the individual names. Put another way, if you happen to own some of the big "toxic" stocks on our list today, your performance could be toast in 2014.
For the record, buying big, safe blue chips doesn't make you immune from owning toxic names. In fact, every single stock on our list today is a large-cap stock that's worth more than $10 billion in market value.
Just to be clear, the companies I'm talking about today aren't exactly junk. 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 on to 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 from your portfolio.
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Cisco Systems
Up first is technology giant Cisco Systems (CSCO). Even though Cisco has rallied 2 points for every 1-point gain in the S&P, don't be fooled into thinking that Cisco's outperformance is likely to continue. In fact, this IP networking name is starting to show signs of a top. From here, the big level to watch is $24.
Cisco is currently forming a descending triangle setup, a price pattern that's formed by horizontal support below shares at $24 and downtrending resistance to the topside. Basically, as Cisco bounces between those two technically significant price levels, it's getting squeezed closer and closer to a breakdown below that $24 price floor. When that happens, we've got a sell signal.
The side indicator in the CSCO trade is momentum, measured by 14-day RSI. Our momentum gauge has been making lower highs since the middle of the summer. That's an indication that selling pressure is accelerating as price falls lower. This doesn't become a high-probability short until $24 gets violated.
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Toyota Motor
Japanese car giant Toyota Motor (TM) has been showing us the exact same setup for the last several months, showing the first cracks after a bounce last month provided a buying opportunity. But recent weakness in shares violated the uptrend, a move that's especially concerning given the relative strength of the Japanese stock market in the last few months.
The breakdown level to watch here in Toyota is $114.
Why all of the significance at $114? 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 shares.
That $114 level in TM is the spot where there's previously been an excess of demand for shares; in other words, it's a price at which buyers have been more eager to step in and buy shares 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, TM doesn't officially become toxic until $114 gets violated.
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ABB
If you've owned Swiss electrical engineering stock ABB (ABB) in 2014, then you have my condolences. ABB has been a miserable performer this year, dropping more than 21% of its value at the same time that the S&P has moved more than 4% higher. And there's little chance of a reprieve in sight. ABB's technical picture is about as ugly as it gets.
Shares of ABB spent most of the year bouncing their way lower in a well-defined downtrend, swatted lower on each successive test of trend line resistance. Those peaks have provided pretty predictable selling opportunities for shares of ABB all the way down. But this week, shares violated the bottom of the price channel, falling through support in a volatile move (shares shed nearly 3.4% yesterday). Investors should expect even more continuation from ABB in October.
Relative strength adds another red flag to the setup in ABB. This stock's relative strength line has been in a downtrend since the first quarter, an indication that ABB has been underperforming the S&P since then (actually, the underperformance began well before that). As long as the downtrend remains intact, ABB's underperformance should continue.
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Comcast
Comcast (CMCSA) was a particularly nasty mover yesterday, selling off 2.65% on the session. But the selling pressure isn't very surprising considering the context of Comcast's chart right now. This stock is looking "toppy" here, and we've got a classic technical pattern in play for investors who want to trade it.
Comcast is currently forming a head and shoulders top, a setup that indicates exhaustion among buyers. The setup 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 CMCSA's neckline at $53, a level that's been important from a technical standpoint going back to June. The next violation of $53 is the signal to sell.
For traders looking to go short CMCSA on the breakdown, the 50-day moving average has been acting like a good proxy for resistance for the past couple of trading sessions. That makes it a logical place to park a protective stop.
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NextEra Energy
Last up on our toxic list is NextEra Energy (NEE) a name that's showing up a head and shoulders top that's nearly identical to the one in Comcast. For NEE, the breakdown level to watch is a little further away, down at $90. Once the neckline gets violated in NEE, then I'd expect this stock to take back all of the gains it's won so far in 2014.
That's because the minimum measuring objective to the downside on this trade is down at $80.
Lest you think that the inverse head and shoulders is too well-known to be worth trading, the research suggests otherwise. A recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant."
That's a good reason to keep an eye on both Comcast and NextEra this week.
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-- Written by Jonas Elmerraji in Baltimore.
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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 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
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