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Warning: Chart Issues 'Sell' Signal for These 3 Blue-Chip Stocks

Michael J. Carr and Amber Hestla-Barnhart

Most stocks move in the same direction as the general market. This bull market is no different, and many individual stocks have put in new highs along with the major indexes.

At times like this, it is important to really look at an index and be alert for signs of a change in the trend. (See Michael's recent article, My System Is Warning Traders to Brace for a Pullback.)

There is certainly no need to sell all stocks now; however, it could be worth getting out of three big names that have weak charts, even though the general market news is good.

Amazon.com (AMZN) has not been as strong as the rest of the market -- an indication that tech stocks could be due for a breather. Tech stocks are often the drivers of a bull market, so this is an important sector to follow.

On the chart below, we show relative strength (RS) at the bottom, and the Momentum of Comparative Strength (MoCS) in the middle of the chart. MoCS converts RS to a Moving Average Convergence-Divergence (MACD) style indicator and provides very clear trading signals.

Amazon has been spending heavily to build its infrastructure, and after reporting a loss in 2012, earnings are expected to come in positive for the next few years.

Analysts expect the company to deliver earnings per share (EPS) of about $1.48 this year, compared with a loss of $0.09 last year.

Assuming the company meets expectations for 2013, it is trading with a forward price-to-earnings (P/E) ratio of about 172. It appears that the stock's price has gotten ahead of the fundamentals and now looks ready to break down.

Goldman Sachs (GS) is also looking weak, a warning that the financial markets could be in for a tumultuous period.

Brokers are considered to be bellwethers of the market. Goldman Sachs is one of the world's leading financial firms and is actively involved in almost every market in the world.

Weakness in GS implies that there could be a problem in a major financial market -- and there are a number of candidates for the next potential crisis. For example, European sovereign debt is still an issue, and no one, except perhaps some investment bankers at Goldman, fully understands all of the exposure banks and funds have to this problem.

GS shows a small rounding top pattern that formed as RS weakened. MoCS is not yet negative, but the trend of the indicator has turned down. RS fell below 70 as the topping pattern formed, which is a sell signal for this indicator.

This confirmed breakdown makes Goldman a sell and is a warning that news from Europe (or another trouble spot) could worsen.

Caterpillar (CAT) is a company whose earnings depend on global economic growth. CAT makes large equipment needed for construction and mining.

A slowdown in mining could indicate that manufacturing demand is slowing, a sign that global demand is slowing. Construction slowdowns generally hurt employment because a number of jobs depend on that sector.

The CAT chart tells the story of a company in an important sector that has failed to confirm the strength of the broader market.

This chart shows that CAT did not participate in the recent bull market. This is a strong divergence that implies the bull market is unsustainable until economic strength increases and companies like CAT get more orders for the equipment needed to build the economy.

Even though stock market averages are near new highs, these three stocks are a sell. Because these companies are so important to the economy and the market, their weakness is warning that all may not be well with the stock market. Sell AMZN, GS and CAT now. And if these stocks are correct and the tech sector, the financial markets, and the economy are weakening, be ready to sell more stocks.

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