Utility stocks are moving back on the offensive, as the Fed rate cuts have traders moving toward dividend-producing names. The entire sector is just starting to gain some traction to the upside.

Traders seem to be slow in moving back toward it, but we may see some increased momentum from the group as the prospect for further rate cuts and aggressive action from the Fed increases. Technically, the sector is in surprisingly strong shape, and the internals are confirming. We would look for a resumption of the uptrend from these levels.

Utility Sector HOLDRs

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The Dow Utility Index pulled back to the long-term uptrend line in mid-August. It then formed an orderly pullback channel, and the stock rallied off of the retest of the trend line and broke the pullback channel to the upside. This is bullish technical action, and it suggests that the group wants to resume the primary move higher.

Breadth is confirming the strength. It never broke down during the corrective action in the broader market and has simply formed a bullish consolidation in the uptrend for liquidity. The strong liquidity line shows that money never really left the sector during the subprime crisis. The prospect of lower rates for the time being should continue to drive money toward the group. An upside breakout in the liquidity line would confirm this.

The one negative is that the 40-day SARSI indicator has moved to overbought levels. This means that the oversold "benefit" has been used up, and the group now has to stand on its own merit. The bullish technical backdrop and favorable rate environment should make the utility sector a strong trade out through the end of the year.

The group is showing significant improvement from the bottom up, and individual names are moving back onto the offensive. A couple of interesting names to look at are

Huaneng Power

(HNP) - Get Report

and

ITC Holdings

(ITC)

.

Huaneng Power is really interesting, since it keeps with our bullish outlook on China and emerging-market stocks. The company is based out of Beijing and operates power plants across China. The growth in basic electrical services is growing rapidly in China, and it presents a growth opportunity that hasn't been seen in the utility sector in a generation.

The stock is breaking out over resistance and is reasserting the primary uptrend. A break of the uptrend channel at $42 would suggest a change in the bullish nature of the chart.

Another interesting name in the utility sector is ITC, which engages in the transmission of electricity from generators to local distribution systems. The stock has broken through resistance and is making new highs. ITC has strong relative strength vs. the utility sector and continues to trend higher. The bulls are in control of ITC, but a break of $42 would suggest the stock has lost upside momentum.

At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.