With the internal indicators at very overbought levels and the indices hard against major resistance, it would appear that the rally is about to fail. But even if it doesn’t, it won’t necessarily float all boats for the remainder of the summer.
At least one thing is clear, and that is that the Dow and its companions are just a hair below a resistance line that connects with the high of 10,736 made on Jan. 13. That high represents the very top of a trading range with a floor at around 9,800. The S&P 500’s range is 1,150 to 1,040, and the Nasdaq’s range is 2,320 to 2,100.
I’ve put together a list of stocks that are headed for a technical breakdown, so sell them if you own them, avoid them if you don’t, or short them if you want to make some money.
Whatever you decide, you need to know that the following stocks could be hazardous to the health of your portfolio.
Stock to Sell #1: Big 5 Sporting Goods Corp. (BGFV)
U.S. sporting goods retailer Big 5 Sporting Goods Corporation (NASDAQ: BGFV) operates 384 stores in 11 states.
The stock broke down from a rounding top in early June at $13.50, following the dreaded death cross in May. It quickly dropped to under $11, and then bounced to its 50-day moving average, where it should be sold. Note the recent sell signal from the stochastic.
Credit Suisse Equity Research notes that the second half 2010 earnings comparison will probably be lower than last year. If consumer sentiment continues to lag and BGFV falls under support at its 20-day moving average at $13, then look for a quick drop to $8 to $10.
Stock to Sell #2: Corinthian Colleges, Inc. (COCO)
Post-secondary education company, Corinthian Colleges, Inc. (NASDAQ: COCO), which provides various diploma programs, has been hampered by the government’s policy of cutting aid to schools with a high rate of student loan defaults. Analysts have regularly reduced Corinthian’s earnings estimates.
Technically COCO double-topped in March/April at just under $20 and made a consistent series of lower lows in a three-month high-volume liquidation. There has been no support even following the bounce to $11 in early July. And on Aug. 4, COCO broke a double-bottom at $8.65, signaling a further decline.
Stock to Sell #3: Caremark Corp. (CVS)
CVS Caremark Corporation (NYSE: CVS)? broke down from a compound top when it sliced through a neckline at $30.50. The decline was followed by a death cross in June, and a new low at under $29. In July, the stock rebounded, but reversed just as it penetrated its 50-day moving average and flashed a new sell signal from the stochastic.
Decreased drug reimbursements from federal and state governments and only modest earnings growth, coupled with inconsistent revenue projections, have led to the stock’s fall. A break under the low at $28 could lead to a quick sell-off to $24. For those shorting this stock, stop-loss orders should be entered at $32.50.
Stock to Sell #4: Gilead Sciences (GILD)
Biopharmaceutical stock Gilead Sciences, Inc. (NASDAQ: GILD) broke down from a broad consolidation in April, following a huge downside breakaway gap. Even though the pace of the decline slowed in June and July, the trend is still down. The recent rally to $35 has been halted at the 50-day moving average. And note the number of “big days” of selling volume.
The likelihood is that the downtrend will continue with a target under $30. Short sellers should consider a stop loss at $37.
S&P recently lowered GILD’s rating, saying that the downgrade “reflects our view of its near-term exposure to U.S. health care reform, which … affects about 45% of its U.S. business.”
Stock to Sell #5: QUALCOMM (QCOM)
QUALCOMM, Inc. (NASDAQ: QCOM), a designer and manufacturer of digital wireless products, has been in a sharp downtrend since topping out at $50 in January. The huge gap down, which opened at $46, is a breakaway gap and a reminder of the negative power in this stock’s decline.
But QCOM is a volatile performer, and in early July it bounced from $32 to $39, which is the trading range within a channel down price collapse. Note the huge selling volume following rallies and the new sell signal from the stochastic.
The target for a short sale is under $30, and a stop-loss should be considered at $41. Credit Suisse Equity Research rates this stock “neutral,” and warns that there are few catalysts on the horizon that will drive earnings momentum.
Stock to Sell #6: Research In Motion (RIMM)
Research In Motion Limited (NASDAQ: RIMM) is a designer and manufacturer of wireless equipment, best known for its line of BlackBerry smartphones. But lately each of its new product offerings seems to be upstaged by rival Apple Inc. (NASDAQ: AAPL).
The stock appeared to be progressing nicely in an ascending triangle early this year until prices broke down in April. That sell-off turned into a broad decline with a death cross in May. RIMM managed a reaction rally in July, but it appears to have run into a wall at the 50-day moving average, and the stochastic recently issued a new sell signal.
It is now trading under its 20-day moving average, plunging again immediately following the introduction of its latest phone. Its low just over $47 will no doubt be tested and, if it fails, look for RIMM to fall to $40.
The Options Trader’s Guide to Technical Analysis — In his latest report, learn how John Lansing leverages the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!