Five charts that scream ‘sell!’

 

There are two distinct camps when it comes to investing. Some investors rely on technical analysis, and others prefer using fundamental analysis when selecting which stocks to buy or sell in their portfolios.

Technical analysis is the practice of looking at chart trends and using the trends to predict which direction a stock is likely to move. Fundamental analysis involves looking into the company's financial performance, and basing an opinion on that.

While I believe there are merits to both approaches, and that a prudent investor should use a combination of both approaches, I prefer to put a heavier emphasis on technical analysis when considering stock purchases or sales.

The primary reason being that the stock market reacts quickly to any news that comes out on a stock. For example, when a company reports its financial results for a quarter, the stock reacts almost instantly to the numbers. By the time you look into a stock, all known news on the company has already been priced into its stock. It is useful to dig into the numbers, and try to figure out why the numbers moved the stock they way they did, but they lose some of their importance once they have already been factored into the current stock price.

On the other hand, a stock's technical pattern is constantly evolving. A stock's trading pattern reflects where the market believes the stock should be trading based on all known information on the company. If you can figure out what the market is telling you, you have a greater chance of predicting where the stock is headed.

Technical analysis involves spotting both buy and sell signals. There are a number of different technical indicators that you can look for when evaluating charts. We are not going to go into all the different technical approaches, but focus on one way to spot a stock in trouble. Technical traders like to use moving averages to predict future stock performance, and when a stock approaches, or trades under its 50-day moving average, that is a huge sell signal, so we are looking for stocks that fall into that category.

If you hold these stocks in your portfolio, consider taking a closer look at your position.

AES Corp (AES)

AES Corp. (AES) is an electric utility company. As you can see in the chart below, the stock recently crossed under its 50-day moving average. The stock's problems expanded when the company announced the public offering of 40 million shares by a subsidiary of China Investment Corporation, but the stock was experiencing problems even before this announcement.

While some stocks can bounce back quickly after crossing under their 50-day moving average, I would hesitate before betting on AES to make any quick recovery. Utilities are capital intensive businesses and typically carry a lot of debt, this means that they do well when interest rates, and debt payments are low, and tend to perform worse when rates are high or rising. The Federal Reserve is expected to begin tapering its monetary easing program early next year, which will apply pressure to the utility sector as a whole. AES may be less affected because its dividend is not particularly high, but if the entire sector weakens, AES will certainly trade lower to some degree as well.


Chart courtesy of stockcharts.com

DeVry Education Group Inc. (DV)

DeVry Education Group (DV) provides educational and training courses around the world. The stock traded sharply higher in the latter part of October, but then traded in a tight sideways pattern through November before recently crossing under its 50-day moving average.

There wasn't a whole lot of news on the stock during the first part of October when it was trending higher; it appears to have been simply trading higher with the broader market. It's momentum was broken however on October 25, when the stock ran into trouble on the heels of a disappointing fiscal first-quarter report. The company reported earnings of 22 cents per share, which were a penny lower than analysts expected. On the bright side, it did post better-than-expected revenues.

The stock remained in a tight sideways pattern for four weeks after its post-earnings sell off, but the recent move below the 50-day moving average indicates that traders have turned bearish on the stock, and shareholders should be aware that more downside could be on the horizon.


Chart courtesy of stockcharts.com

Alpha Natural Resources (ANR)

Alpha Natural Resources (ANR) is a coal-mining company that recently fell below its 50-day moving average. The stock has shown a lot of volatility in recent months, and based on the chart below I believe shareholders may encounter more pain in the days ahead.

The stock enjoyed nice gains during the latter part of October, but troubles once again hit the stock following a negative research from Citigroup. Citigroup analyst Brian Yu cut his rating on the stock to Sell from Neutral and slashed his price target on the stock from $7.10 all the way down to $5.10.

The company has done a good job cutting its costs, but it is still highly dependent on coal prices, and the outlook is not great for coal. Demand for coal used to produce energy has diminished as utility companies switch to natural gas because of its low cost. Coal has also become the target of environmentalists as a root cause for climate change. There has really not been a lot of reason to get excited about coal producers in recent years.

Looking at the chart below, what I believe will occur is that the stock will move higher from its current price of $6.34 to test resistance at $6.90, before once again moving lower. I would suggest watching it for a couple of days and use any strength as an exit point, however, if the stock does not bounce in the next week or so, you may want to consider exiting the position and looking for a stock with better value.


Chart courtesy of stockcharts.com

SanDisk (SNDK)

Data storage device maker SanDisk (SNDK) rose to a new 52-week high just six weeks ago, but the chart below raises some serious concerns. There really hasn't been much bad news on the stock lately, other than a downgrade by research firm Nomura, which cut its rating from Neutral to Reduce, and lowered its price target to $56 from $66.

I am not particularly bearish on the company, but looking at the chart I believe the stock has further to fall. If you take a look at the chart below, you will notice that the chart looks very similar between June and July as it looks through October and November. In both cases, the stock got stuck in a sideways pattern, but when it broke under its 50-day moving average in July the stock traded sharply lower. If the stock repeats this action again now we could once again see traders aggressively selling the stock.

I don't believe that SNDK is going to drop to the $56 price target that Nomura recently put on the stock, but I think it could easily fall from its current price of $66.41 down closer to $60 or $61 a share. If you own this stock, do a little homework on it. Most likely, you are sitting on some pretty sizable gains considering its movement through the year… you may want to lock in some of those profits in case history repeats itself.


Chart courtesy of stockcharts.com

BP Plc (BP)

Oil giant BP Plc (BP) has not yet fallen to its 50-day moving average, but it appears to be headed in that direction. There are a couple things about the chart below that worry me at the current time regarding where BP stock is headed.

First is the stock's momentum towards the 50-day moving average. The second is the recent head-and-shoulders formation that formed during the month of November. You can clearly see how the stock hit a level of resistance around $47 that it was unable to break through. This formed a classic head-and-shoulders pattern, which is one of the more reliable chart patterns in predicting future moves.

When the stock formed the head-and-shoulders pattern, it started quickly trading lower, to its current price of $45.73. With momentum being what it is, the stock will almost certainly continue falling until it hits its 50-day moving average, at which point I believe even more sellers will come in to the stock.

The company reported very strong third-quarter results towards the end of October. BP reported earnings of $1.17 per share, which easily topped the $0.97 analysts had forecast, which sent the stock soaring. Unfortunately, because of the big gap up in price, there is no support for the stock at its current price. There was some support at $46, but it has already fallen through that level.

I believe the stock will continue trending lower until it touches its 50-day moving average, and if the stock falls through that level, we could witness a sizable move lower. You may want to consider taking some profits off the table on this stock.


Chart courtesy of stockcharts.com

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.


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Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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