BALTIMORE (Stockpickr) -- Think utility stocks are boring performance drags you should avoid in 2014? Think again.
After some weak performance at the start of the year, utilities are stepping in front of other sectors from a momentum standpoint in March. That may be surprising for a set of businesses that are more commonly tied to income investors' portfolios than momentum traders' portfolios. But the fact is that investors should ignore utility stocks at their own peril this year. Many of these names look ready to make a big move higher.
It is true that trading utility stocks can be an exercise in patience the trading setups in this sector tend to be longer-term trades. But on the flipside, breakouts in utility stocks have longer-term trading implications too.
So, which utility names look best-positioned for big moves? Today, we're taking a technical look at five of them .
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
First up is Duke Energy (DUK), a $50 billion Charlotte, N.C.-based electric and gas utility. Duke has done a whole lot of nothing year-to-date, moving a whopping 0.88% higher since the calendar flipped over to January. But zoom the chart out, and the trade in play in DUK looks a whole lot more compelling.
Duke is currently forming an ascending triangle pattern, a bullish price setup that's formed by a horizontal resistance level above shares at $72 and uptrending support to the downside. Basically, as DUK bounces in between those two technical price levels, it's getting squeezed closer and closer to a breakout above that $72 level. When that happens, we've got our buy signal in shares.
It's important to bear in mind that "conventional" technical indicators like RSI don't provide much value to a long-term setup like Duke's unless you stretch out the time period beyond the defaults. While this pattern is going to take longer to play out than most trades, that's a good problem to have as the broad market gets closer to another correction.
South Dakota-based gas and electric company NorthWestern (NWE) is showing us the exact same setup right now. Like Duke, NorthWestern is forming an ascending triangle pattern, in this case with resistance at $47. A move through that $47 price ceiling means that it's time to be a buyer.
Why does that level matter? It's not magic. Rather, it has everything to do with what buyers and sellers are doing. Pattern names like "ascending triangles" are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. It all comes down to supply and demand for shares.
The $47 level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Keep an eye on NWE's $47 price level in the sessions ahead.
MDU Resources Group
You don't have to be an expert technical analyst to figure out what's going on in shares of MDU Resources Group (MDU). The setup in shares of this $6.25 billion utility stock is about as basic as it gets. Shares of MDU have been bouncing higher in an uptrending channel since back in September. When it comes to price channels, up is good and down is bad; it's really as simple as that.
The channel in MDU gives us a high probability range for shares to stay within. And now, with MDU retreating from a test of trend line resistance in February, it makes sense to be a buyer as close to trend line support as possible.
It shouldn't be a big surprise that we're seeing a similar setup in shares of Atmos Energy (ATO), a $4.56 billion natural gas distribution and transmission stock. After all, Atmos and MDU both have outsized exposure to the natgas business, so they're a lot more likely to correlate with one another. The big difference in Atmos is the fact that this stock is already testing trend line support this week.
That means buyers have an opportunity to jump into shares on a bounce.
Waiting to buy off a support bounce makes sense for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring ATO can actually still catch a bid along that line before you put your money on shares.
While trend line resistance at R2 is the price ceiling that defines the "textbook" channel in ATO, another resistance level in R1 has been in play since last summer. If shares can muster the buying pressure to push above that lower resistance level, this stock could be in store for a big move up. More risk averse traders should start unwinding their position at the more conservative level.
Not all of the utility names we're looking at today are bullish. In fact, UK-based gas and electric utility National Grid (NGG) is starting to look downright "toppy" thanks to a classical pattern that's been forming in shares since December. Here's how to trade it.
NGG is currently forming the early stages of a head and shoulders top, a bearish reversal setup that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal came on a move through the neckline just below $63. If that price level gets violated, it's time to steer clear of NGG.
Relative strength is starting to show some important weakness already; shares broke the uptrend in the indicator at the start of this month. I wouldn't recommend selling (or shorting) NGG until shares slip through $63; when that happens, we have our signal that buyers have abandoned this stock. Support at $56 is the next buying opportunity after that.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.