BALTIMORE (Stockpickr) -- The "summer doldrums" are living up to their name this year. The last few months have brought sideways churning in the big stock indices, with little in the way of direction. For every step the broad market takes forward, it takes another step back.
But some unexpected corners of the market have been showing signs of life.
For instance, the utilities sector has been heating up this summer. Since the beginning of July, the Dow Jones Utilities Average has rallied about 7%, stomping the barely-there performance of the Dow Jones Industrial Average and the S&P 500 over that stretch. It turns out investors are turning back to big dividend payouts and stable business models in light of the mediocre performance elsewhere in the market.
So today, we're turning to the charts for a closer look at five big utility trades to take for gains in August.
In case you're unfamiliar with technical analysis, here's the executive summary. 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 mid-cap natural gas utility WGL Holdings (WGL). The last year has come with some stellar price action in shares of WGL Holdings. This stock is up more than 34% since this time last summer, on top of a hefty 3.3% dividend yield today. And while it looks like momentum has cooled in shares of WGL, shares are actually showing signs of a second leg higher in the near-term.
WGL Holdings is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $58 and uptrending support to the downside. Basically as WGL bounces in between those two price lines, it's been getting squeezed closer and closer to a breakout above our $58 price ceiling. When that happens, we've got our buy signal.
Relative Strength, (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in WGL right now. That's because relative strength is holding its uptrend from last fall, indicating that this stock is still outperforming the rest of the market. The price setup in WGL is long-term, and it comes with equally long-term trading implications when the breakout happens.
We're seeing the same price setup in shares of $52 billion energy utility Duke Energy (DUK - Get Report), except there's a bit of a twist. Duke is forming its ascending triangle pattern at the bottom of a downtrend that's shoved shares about 15% lower since their peak in January. Even though this pattern isn't exactly textbook, the trade is exactly the same here. Duke Energy becomes a buy on a breakout above $75.
Why all of that significance at that $75 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in Duke Energy, 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 Duke's stock.
The $75 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 this week's breakout above $75 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Remember to be reactionary with this trade. Duke Energy has been under pressure all year long, and upside doesn't become a high-probability move until buyers can take out that $75 line in the sand.
The good news is that you don't need to be an expert trader to figure out the price action in shares of $5 billion utility stock NiSource (NI - Get Report) -- the pattern in play here is about as simple as they get. For more than a year now, NiSource has been moving up and to the right in a well-defined uptrending channel. And that long-term trading range is sending a buy signal to investors this week.
The price channel in NiSource is formed by a pair of parallel trend lines that have enveloped this stock's movements since last year. Put simply, every touch of the bottom of the channel has been a low-risk, high-reward buying opportunity in shares of NiSource, and shares are bouncing off that level again this week. From here, it makes sense to buy the next leg off of support.
Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room 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 the channel breaks, and you know you're wrong).
Remember, all trend lines do eventually break, but by actually waiting for this bounce to happen first, you're ensuring NiSource can actually still catch a bid along that line before you put your money on shares.
Must Read: 5 Rocket Stocks to Buy for Gains This Summer
$16 billion utility holding company Eversource Energy (ES - Get Report) is another straightforward long-term trend play to watch this summer. Like a lot of utilities, this stock has spent most of the year selling off, down more than 10% since the First week of February. But more recently, the trend has turned much more positive.
Last month, Eversource Energy broke out above the resistance level for its downtrend, and it looks like we're getting a long-term change in trend as a result. Since then, shares have been bouncing higher in a near-term uptrend. It's a little early to call the new trend in Eversource established, but all indications point to higher ground ahead, particularly with shares sitting above prior resistance at $49.
Momentum, measured by 14-day RSI, adds some extra confidence to the Eversource trade. That's because our momentum gauge moved above 50, a level not held since shares peaked earlier this year. An RSI reading on the upper half of the scale is a sign that this stock has transitioned from correction-mode to an upside trend.
Last up on our list is Alliant Energy (LNT - Get Report), a $7 billion Wisconsin-based utility stock. At a glance, Alliant's chart looks a lot like the chart of Eversource -- shares have been basing after spending most of the year selling off. The big difference here is that Alliant's reversal setup is a little better-defined than the one in Eversource. Here's how to trade it:
Alliant Energy is currently forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. Alliant's pattern is formed by two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal came on the breakout above the pattern’s “neckline” level. That's the $62 level in Alliant.
The inverse head and shoulders pattern may have a clunky name, but it works -- an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” That’s a good reason to keep an eye on $62 in shares of Alliant Energy this week.
Once the breakout happens, the 50-day moving average looks like a good place to park a stop.