Market lore keeps close watch on utility stocks for signs of economic strength or weakness. This canary-in-the-coal mine sector

can expose recessionary environments

, as well as turning points ahead of periods of cyclical growth. Simply stated, recessions usually don't happen, or are shallower than expected, when this group is in rally mode.

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All this gives the sector's current performance in this ugly bear market added significance. Utility stocks have acted better than expected since mid-October, holding high in their two-month trading ranges and never testing deep lows, unlike the broad indices. This supports a more positive technical tone for the group heading into 2009.

Dow Jones Utility Index

Click here for larger image.

Source: eSignal

The Dow Jones Utility Average posted an all-time high in January of this year and then pulled back. It broke the neckline of a 19-month head-and-shoulders topping pattern in September and sold off to a four-year low on Oct. 10 before shooting higher with the broad market. That bounce stalled near 400 just a few days later.

The index has been moving sideways since that time in a 70-point range defined by resistance at the bounce peak and support near 330. When the major indices broke the October lows before the Thanksgiving-week rally, this instrument held 37 points above its comparable low and jumped back to pattern resistance on Friday.

This relative strength points to renewed buying interest in the sector as well as early speculation that 2009 economic conditions won't be as severe as currently forecast. While it's foolish to assume too much from the uptick, the sponsorship tells us that investors are getting a bit more aggressive in this tough market.

Last week's rally helped the index by lifting price to six-week resistance. A buying thrust above Friday's high would complete a bullish Adam-and-Eve double bottom and mount the 50-day moving average. In turn, that would even support a continued recovery that could reach more formidable resistance near 450.

The 15 blue-chip components of the Utes are a mixed bag, with one-month performance ranging from a high of 15% by

Centerpoint Energy

(CNP) - Get Report

and a low of -9% by

Williams Companies

(WMB) - Get Report

. Notably, these extremes track relative exposure to natural gas prices, as well as energy hedging practices.

Therein lies the greatest challenge in predicting utility stock performance going forward: Each company is uniquely vulnerable to energy price fluctuations. As a result, the massive decline in natural resource prices in recent months may overshadow the historic role of utility stocks as a measure of broad economic conditions.

As a technician, I get to avoid this conundrum because the charts should tell me everything I need to know about sector price development between now and the first quarter of 2009. With that in mind, here are three utility stocks with relatively bullish patterns that might support higher prices in the months ahead.

Public Services Enterprise Group (PEG)

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Source: eSignal

Public Service Enterprise Group

(PEG) - Get Report

is a mid-Atlantic utility that posted an all-time high at $52.30 earlier this year and sold off with the broad market. It bottomed out in the low $20s in October and shot back to $31 before dropping into a tight consolidation pattern that's persisted for the last six weeks.

Although price is still trading within a narrow range, it nosed up to the October recovery high during Friday's half-day session before turning lower in Monday's selloff. A rally above $31.50 will finally break this sideways pattern and support a renewed uptick that could reach the 200-day moving average, currently at $37.30.

Allegheny Energy (AYE)

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Source: eSignal

Allegheny Energy

( AYE) is a Pennsylvania electric provider that has a similar look to the other charts posted today. However, the post-October base dropped price closer to the low, generating a classic symmetrical triangle. The stock broke out of this formation last week, mounted the 50-day moving average and went vertical into Friday's close.

It's now overbought and pulling back after five rally days in a row. The current decline could fill the breakout gap between $30 and $31, offering a low-risk second-chance entry opportunity. In the meantime, just stand aside and don't chase the stock, because it's already halfway to the reward target at the 200-day moving average near $42.

Great Plains Energy (GXP)

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Source: eSignal

Great Plains Energy

(GXP)

supplies energy needs for over half a million customers in Missouri and Kansas. The pattern is a variation on the common sector theme, with a base that evolved after the deep October low. But the sequence of lower highs within the range has generated a six-week trend line that should attract buying interest, once broken.

Price rallied into trend-line resistance at Friday's close and sold off in Monday's broad decline. The next bounce into this level should do the trick and trigger a buying spike up to secondary resistance at the 50-day moving average. A rally over that level would support a momentum move into the mid-$20s.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

Know what you own: Farley mentions the Dow Jones Utility Average. Other components of the index include Duke Energy (DUK) - Get Report and Consolidated Edison (ED) - Get Report.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in

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,

SmartMoney

,

Tech Week

,

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,

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,

Technical Investor

,

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and

Online Investor

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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