BALTIMORE (Stockpickr) -- Want to outperform in April? Then utility stocks are your best bet.
No, that's not a misprint. Utility stocks have taken performance leadership in 2014.
That makes sense for two big reasons: First, boring utility stocks have been offering the opposite of the hefty valuations in the momentum names that have been selling off in March and April, and second, Janet Yellen's cooling down of the Fed's interest rate hike talk bodes well for high-yielding utility stock values.
Ever since the new Fed Chairman calmed interest rate fears at the end of March, investors have been unloading former momentum leaders in favor of utility stocks. She's the one who flipped the switch.
"Don't fight the Fed" is pretty good advice right here.
Instead, we're turning to big trades from the utility sector to protect from downside in April. Today, we'll take 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.
$5.2 billion regulated utility Pepco Holdings (POM) is the prototypical example of utility sector leadership in this market. While other names have been selling off for the past two sessions, POM was busy breaking out to new highs. But don't worry if you missed the move: Pepco has more upside ahead of it.
That's because yesterday, Pepco broke out of a rounding bottom setup, triggering a high-probability buy signal in today's session. The rounding bottom is a price setup that indicates a gradual transition in control from sellers to buyers. The patterns name is a pretty good description of how it looks on a chart. Even though POM's rounding bottom came in at the top of its recent price range (not the bottom), the trading implications are just the same. The breakout through former resistance at $20.50 was our buy signal in Monday's session.
Energy holding company NiSource (NI - Get Report) is another utility stock that's shaping up into a solid breakout trade this week. Outperformance is nothing new at NI -- this name has rallied more than 15% in the last six months, 1.5 times better performance than the S&P 500 has managed to achieve over that same timeframe. And now, NI looks ready to push to even more upside.
NiSource is currently forming an ascending triangle pattern, a bullish price setup that's formed by a horizontal resistance level above shares (in this case at $36), and uptrending support to the downside. Basically, as NI bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakout above that $36 price ceiling. When that happens, we've got a buy signal in this stock.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in NI right now. Our momentum gauge has been in a long-term uptrend of its own, making higher lows even before the pattern started forming in NI. Since momentum is a leading indicator of price, that fact bodes well for this stock's staying power after the breakout through $36 happens.
We're seeing the exact same setup in shares of Dominion Resources (D - Get Report), a diversified utility name with big exposure to generation and transportation assets as well as a retail energy business. Dominion's ascending triangle pattern sports a resistance level at $71. When that $71 level gets taken out, we've got our buy signal, but not before then.
Why all the significance at $71? It all comes down to buyers and sellers. Price patterns are a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Dominion's stock.
The $71 resistance level, for instance, 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 $71 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
MDU Resources Group
MDU Resources Group (MDU - Get Report) is a more simple utility sector setup worth watching this week. No, you don't need to be an expert technical analyst to figure out what's going on in this stock. Instead, a quick glance at the chart will tell you everything you need to know.
MDU is bouncing higher in a well-defined uptrend. This stock's trend line support level has acted as a strong floor for shares since early December, spring-boarding shares higher on their last six tests of that price level. In short, MDU is a "buy the dips" stock, which means this name is looking pretty buyable as shares approach trend line support for a seventh time.
Relative strength has been in a solid uptrend for the last several months, an indication that MDU is continuing to outperform the broad market on both the up-side and the down-side. With the S&P in correction mode right now, relative strength remains the most important tool you can have in your trading toolbox.
El Paso Electric
Last up on our list of utility trades is El Paso Electric (EE - Get Report), a small-cap generation, transmission, and distribution stock. El Paso has been bouncing higher in an uptrend of its own for the past six months and change, providing investors with its down "buy the dips" opportunity since September.
If anything, El Paso's setup is actually more textbook than MDU's. That's because it's bouncing higher in a channel that sports resistance to the upside in addition to the trend line support level below EE's price action. Here again, the high probability trade in EE comes when you buy the bounce off of support. While that means that investors will need to show some patience for this stock to retrace to the lower blue line, doing so skews the outcome dramatically in your favor.
Buying off a support bounce makes sense for two big reasons: Its the spot where shares have the furthest to move up before they hit resistance, and its the spot where the risk is the least (because shares have the least room to move lower before you know youre wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, youre ensuring the EE can actually still catch a bid along that line.
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.