BALTIMORE (Stockpickr) -- Think utility stocks are boring? Think again.
The utility sector was a phenomenal performer last year. The Utilities SPDR ETF (XLU) gave investors total returns of 28.7% in 2014, more than doubling the performance of the big S&P 500 index. And even though utility stocks have given some of that back in 2015, it's a mistake to think that the upside action is over and done with.
With the Fed's constant interest rate hike promises and admonitions, avoiding income stocks has become a pretty crowded trade at this point -- at the exact same time that rates are scraping along all-time lows. As some of the biggest utility stocks start to show signs of life, it makes sense to take a technical look.
To do that, we're turning to the charts to find five big utility stocks to buy for breakout potential.
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.
Public Service Enterprise Group
Up first is Public Service Enterprise Group (PEG), a $21 billion utility holding company that's spent most of 2015 churning sideways. That sideways grind in shares of PEG may be frustrating for shareholders, but the good news is that the lateral price action is actually what makes PEG look tradable right now.
PEG is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up at $43, and uptrending support to the downside. Basically, as PEG bounces in between those two technically-significant price levels, it's been getting squeezed closer and closer to a breakout above our $43 price ceiling. When that happens, we've got a buy signal in shares.
Momentum, measured by 14-day RSI, adds some extra upside confidence to the setup in PEG. Our momentum gauge has been in an uptrend since the bottom of the ascending triangle back in February, indicating that buying pressure is building in this stock. While there's a secondary resistance level at $44, it's not as material as the $43 level. If buyers can muster the strength to clear $43, then PEG bulls should be able to handle new highs as well.
American Electric Power
We're seeing the same setup in shares of American Electric Power (AEP). Like PEG, AEP has been forming an ascending triangle pattern for the last couple of months, squeezing closer to a big breakout. For AEP, the level to watch is $58 resistance.
Why all of that significance at that $58 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in AEP, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for American Electric Power's stock.
The $58 resistance level is a price where there has been an excess of supply of shares. In other words, it's a spot 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 $58 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
It's important to be reactionary on this breakout trade. Wait for shares to catch a bid above $58 before you buy AEP. From there, a fairly significant resistance level at $64 looks like a good upside level to shoot for.
American States Water
American States Water (AWR) isn't your typical utility stock; this firm's utility business includes water service, making it a unique income play. That differentiation has helped AWR outperform the rest of the utility sector in 2015, but it hasn't spared the firm from a sideways slug in the last few months. But shares could be about to come alive again this spring.
The sideways price action in AWR is a "rectangle" pattern. It gets its name because the pattern basically "boxes in" shares between those support and resistance lines. For American States Water, the levels to watch are resistance up at $41.50 and support at $38.50. It pays to be reactionary with this price chart, after all, rectangles are "if/then patterns." Put a different way, if AWR breaks out through resistance at $41.50, then traders have a buy signal. Otherwise, if the stock violates support at $38.50, then the high-probability trade is a sell.
Because AWR's prior trend was up, it favors breaking out above $41.50. Still, it's important to be reactionary and wait for AWR's shares to exit the rectangle before you take sides on this trade. Technical analysis is a risk management tool, not a crystal ball, and this doesn't become a high-probability buy until our price ceiling gets taken out.
You don't have to be an expert trader to figure out what's going on with NiSource's (NI) chart. This natural gas and electricity utility has been moving up and to the right for the last year and change, working its way higher in a textbook uptrend. With that price setup still very much intact in 2015, it makes sense to buy the next bounce off of the bottom of the channel.
Waiting for that bounce is important for two key 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 NI can actually still catch a bid along that line before you put your money on shares.
Relative Strength, down at the bottom of the chart, adds some extra evidence to the upside in NI. That's because relative strength has been in an uptrend of its own over the course of the price uptrend, which indicates that NI isn't just moving higher -- it's outperforming the rest of the market long-term. As long as that relative strength uptrend remains intact, NiSource should keep beating the S&P.
Last up on our list of breakout utility stocks is CenterPoint Energy (CNP). This $9 billion public utility stock has been a horrible performer lately, dropping more than 14% in the last six months. But long-suffering shareholders could be in for a reprieve shortly. This stock is starting to look "bottomy" now.
CNP is currently forming an inverse head and shoulders pattern. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline" level. That's the $21.50 level in CenterPoint.
Momentum is an important add-on indicator on this chart too -- 14-day RSI made higher lows on each of the troughs in CNP's inverse head and shoulders setup. That's a bullish divergence that indicates buyers have been building in this stock. If $21.50 gets taken out, then it's time to buy the reversal in CNP.