This column was originally published on RealMoney on Nov. 28 at 11:59 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
The most popular utility indices and exchange-traded funds rallied above multiyear resistance in October, setting the stage for strong uptrends that should last well into 2007. It isn't too late for traders and investors to take advantage of this developing rally.
Monday's column, I pointed out supportive factors for rising prices in the group and examined two well-known sector vehicles, the
( UTH) and
Utilities Select Sector SPDR
. Today I'll follow up with a look at six utility stocks that could move higher in the months ahead.
First, let's talk about dividends. Utility stocks pay higher-than-average dividends, so they're an important consideration in choosing sector exposure. But to keep things simple, I'll focus on the price charts today and ask that readers do their own homework regarding dividend percentages and payment schedules.
One particular attribute of dividends should be noted if you're flipping utilities for short-term gains. Find out the ex-div date before taking exposure because the gap downs triggered by this quarterly adjustment rarely match the eventual payments. The volatility triggered by this imbalance can generate interesting opportunities and dangers.
is a gas utility located in the southeastern U.S. Natural gas prices are moving higher, and utilities with exposure to the commodity show rising strength. This stock hit an all-time high at $44.31 in October 2005 and dropped into a deep correction. It returned to this level four months ago and has been moving sideways since that time.
This price action completes a 13-month cup-and-handle breakout pattern. A rally above resistance at the old high should trigger an uptrend that carries the stock through "round number" 50 during the first quarter of 2007. What's the best time to buy the stock? Any short-term dips to $42.50 should offer low-risk entry.
American Electric Power
American Electric Power
jumped above four-year resistance in October, after gapping higher on heavy volume. The move stalled out more than four weeks ago and the stock has been moving sideways in tight congestion since that time. This pattern could give way to higher prices at any time.
The stock hit its historic high just below $50 in 2001. This level offers a logical reward target for a follow-through rally. Keep in mind that a selloff out of the sideways pattern could yield an intermediate correction that fills the gap in the upper $30s. So keep a stop loss below the 50-day moving average if entering before a confirmed breakout.
( MIR) emerged from Chapter 11 bankruptcy in January of this year. The reorganized company moved sideways for eight months and jumped to a new high in August. That move stalled out just below $30, with the stock dropping into a small cup-and-handle pattern in the last three months. Price action has been mixed in recent sessions.
Accumulation within this potential breakout pattern is mildly bearish, suggesting it will take more time before the stock has the sponsorship needed to rally up and through resistance at "round number" 30. In the meantime, aggressive players can build positions on downturns into the 50-day moving average, currently at $28.63.
is still trading well below the all-time high near $50, struck back in 1999. The decline following that peak didn't end until the stock had lost more than 90% of its value in early 2003. The recovery after that low mounted $15 in January and stalled out. The stock returned to this level last month and dropped into a holding pattern.
Relative strength cycles in several time frames are perking up, suggesting the stock is nearing a breakout to new yearly highs. That rally would face little resistance until price approaches $17. It isn't a huge reward target but this is a low-volatility issue that trades an average daily range of less than 20 cents. This allows for large position sizing.
is one of the strongest 2006 performers in my utility database. The stock broke out to an all-time high in July and reached $42 in late October. Note the volatile gap down and recovery on Nov. 2. That wide-range bar marks major support that should not be violated for the rest of this year.
The bullish pattern in the last month is setting up clear resistance above the October high. A spike through that price level should draw in broad buying interest and trigger the next leg of this stock's persistent uptrend. Early positions taken on pullbacks to $41 could find substantial rewards in the weeks ahead.
rallied to an all-time high in July and stalled out. Two selloffs below the 50-day moving average since that time found willing buyers and let the stock build a solid base for a run back to the highs. The sharp rally after Thanksgiving day has finally lifted price back into that key level.
This pattern has negative characteristics because selloffs within the correction show above-average volume. This means accumulation is weak, compared to surging price. It's best to tread lightly with this divergence and wait for fresh buyers to support the uptrend. A move above $35.50 should have major legs after we see a few buying surges.
At the time of publication, Farley had no postions in stocks mentioned, 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;
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