TXU Looks Charged Up

In bullish times, one part of the market that frequently gets overlooked is the utility sector. Utilities just aren't very sexy when compared with super-high-beta tech stocks that are rising day after day.

In fact, utility stocks often call to mind a defensive posture. You probably think of bear-market safety, not bull-market aggressiveness.

However, one stock in the utility sector is acting just fabulously, and that's TXU (TXU - commentary - Cramer's Take). In fact, the chart of this Dallas-based electricity producer is on the precipice of a strong wedge breakout that could produce strong gains if and when the move is made.

The key to a wedge breakout, which I recently discussed in a column about the Dow, is that you'll see strong negative divergences near the top if it's a bear wedge or strong positive divergences near the bottom if it's a bullish wedge.

On the chart below, you can see on the most recent low that the MACD is higher. That indicates that a positive divergence is in place -- thus indicating a bullish wedge.

Click here for larger image.

You can see the contracting volume on the down days as the price nears the bottom of the pattern, and the increasing volume on the up days. This combination of volume and divergences is critical to allowing this stock to make the move up and out of that wedge. The key level to watch for this is at $54.40.

Let's now take a close look at what the measurement of this move would be, once a strong breakout of this bullish wedge takes place. The top of the wedge shows a price high of $64.93 made in late October, while its low was made in mid-September at $58.87. The difference between the top and the bottom of the wedge is $6.06. Therefore, you could expect a rise of about $6 on a breakout. All you have to do now is wait and watch for the stock to clear the trend line, indicated on the right side of the chart above.

The measurement is clear, and you can take advantage of it, but please make sure the breakout is there. How will you know for sure? If the breakout occurs and you buy it but the stock falls back into the wedge during the trading day, don't panic. I'd only sell it if it breaks out and then closes below the bottom of the wedge itself. Intraday ticks shouldn't be part of your decision-making process here; you'd focus your attention on the closing levels.

Even if the breakout does occur, remember that news can hit any stock at virtually any time. Therefore, I'd suggest you consider taking profits along the way.

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At the time of publication, Steiman had no positions in any of the stocks mentioned, although positions may change at any time.

Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback; click here to send him an email.