Don Your Green in Energy, Utilities and Defense

These sectors of the economy look poised to do well.
By Alan Farley ,

Editor's Note: This is a bonus story from Alan Farley, whose commentary usually appears only on

RealMoney

. We're offering it today to

TheStreet.com

readers. It originally published 11:19 a.m. EST on RealMoney today. To read Farley's commentary regularly, please click here for information about a free trial to

RealMoney.

Let's step back and see what's working in the current market environment. Perhaps we should start by looking at plays you should be avoiding at all costs.

This dismal listing includes tech, biotech and the blue chips, at least on the long side. It also features most single-digit stocks, one of my all-time favorite groups. These small wonders flamed out last year and haven't shown signs of life in months.

So is it time to go heavy on the short side? I've spent a lot of time trading intraday short sales recently, but the big picture doesn't support a greater commitment yet. The

Nasdaq

averages are testing their January lows, while the blue chips just failed at multiyear highs.

I like to have the wind at my back when trading the short side on overnight positions. This means waiting for the indices to break down from long-term support, which hasn't really happened yet. Of course, that may change quickly after this week's nasty selloff.

Curiously, energy stocks find themselves in the category of high-risk buying decisions. The public's newfound love of the sector triggered recent profit-taking despite crude's assault on multiyear highs. Even as oil prices spiked above $57 per barrel this week,

ExxonMobil

(XOM) - Get Report

was still trading 5 points below its vertical run.

Chemical Reaction

Basic materials and commodity stocks have also begun to pull back, with distribution showing up in chemical stocks such as

Lyondell Chemical

( LYO), construction suppliers and mining stocks. Normally this price action represents a good buying opportunity, but the high volume on the downturn is disturbing.

Many first-quarter highfliers need to stabilize at lower levels before they find the buying interest needed to resume their uptrends. But they could get much-needed help in the short term. We're headed into the bullish seasonality of quarter-end window dressing starting next week.

This suggests the first "what's working now" trade. Once triple-witching expiration is behind us, find energy and commodity stocks that show the least damage on the downturn and buy breakouts from short-term patterns. The idea is that these stocks will get scooped up heavily into the end of the month because funds need them in their portfolios.

Don't stick around too long, though. Window dressing vanishes after the first trading day of the new month. So take what you can get on these positions and jump back to the sidelines. The odds favor additional shakeouts in both groups through the early part of next quarter.

Attractive Window Dressing

Many energy stocks suffered technical damage in the recent pullback. But some issues have held their buying interest despite falling prices. Traders interested in this window-dressing play, and the fact that oil is pushing $60, can start by looking at

Holly

( HOC),

Unocal

( UCL) and

Pride International

( PDE).

Many utility stocks were trading at or near all-time highs just a few weeks ago. The group then got caught in a shakeout that triggered strong selling in many components. A number of these issues have recovered in recent days, while others are still searching for intermediate lows.

Utility stocks reflect the major issues facing this market better than any other sector. Group profits depend on interest rates and fossil fuels -- the two reasons behind the broad market decline. Utility stocks actually forecast recessionary periods when they fall apart. So recent strength encourages a more bullish outlook on the market's future.

Utes and You

CMS Energy

(CMS) - Get Report

just popped its head above a symmetrical triangle and looks ready to resume an uptrend that accelerated at the start of this year. You can find a variety of bullish plays in the utility sector these days. After shining a light on this stock, plug into

Entergy

(ETR) - Get Report

,

Duke Energy

(DUK) - Get Report

and

Exelon

(EXC) - Get Report

.

Consolidation in the defense sector is contributing to solid buying interest. Industry leader

Boeing

(BA) - Get Report

is now pulling back after a run to multiyear highs, while other defense names are engaged in solid bull runs. And it looks like there's time to take advantage of the uptrend as long as you stay patient on this pullback.

There are so many facets to defense spending that fundamentally-oriented readers may want to get a subscription to

Jane's Defence Weekly. I'm not sure the editors envisioned it as a trading newsletter, but stranger things have happened when it comes to the markets.

Playing Defense

Rockwell Collins

(COL)

is my favorite play in the defense sector. The stock is pulling back from an all-time high after a strong move that neared $50. If you want to become a top gun in this sector, you could also take aim at

Alliant Techsystems

(ATK)

,

Esterline Technologies

(ESL)

and

Moog

-- both

A shares and

B shares.

At the time of publication, Farley was long CMS Energy, although holdings can change at any time.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com.

Also,

click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

Loading ...