Utility stocks are on fire in 2016. While the rest of the broad market is down materially year-to-date, the utility sector is one of the few corners of the market that's actually up. And it's up quite a bit too.
For instance, the SPDR Utilities ETF (XLU - Get Report) has rallied 5.93% since the calendar flipped to January. That might not sound like much. But for a little perspective, keeping up that pace for the rest of the year would amount to a 93% annualized gain.
The interesting thing is that utility stocks aren't starting to fade as we head into February. Quite the contrary. Utility stocks are actually showing some breakout moves this week. To take full advantage of the relative strength in the utility sector, we're turning to the charts for a closer look at five stocks that look best-positioned for upside from here.
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, here's a rundown of five technical setups that are showing solid trading potential right now.
Up first on the list of breakout utility trades is $13 billion electric utility Entergy (ETR - Get Report) . Entergy has been a solid performer in the last few months. After starting last year on a sour note, shares finally made a bottom back in September, and they've rallied more than 16% since then. For comparison, the S&P 500 is up less than a percentage point over that same timeframe.
But don't worry if you've missed the up-move in Entergy. This stock looks ready to kick off a second leg higher in February, thanks to a breakout that triggered last week.
Entergy is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $70 and uptrending support to the downside. Basically, as Entergy bounces in between those two technically-significant price levels, shares have been getting squeezed closer and closer to a breakout. Shares finally closed above that $70 line in the sand last week; that's our buy signal.
The 50-day moving average has started acting like support in Entergy in the last month or so. That makes it a logical place to park a stop loss order below. If the 50-day gets violated, then you don't want to own this stock anymore.
We're seeing the exact same price setup in shares of FirstEnergy (FE - Get Report) right now. Like Entergy, FirstEnergy has spent the last few months forming an ascending triangle setup, in this case with a breakout level up at $33. Unlike Entergy, the breakout above $33 hasn't been confirmed yet in FirstEnergy. Shares have spent the last few days hovering around that level without materially exceeding it.
But shares are within grabbing distance of a confirming the breakout this week, giving traders very good reason to keep a close eye on this stock today. If FirstEnergy can close meaningfully above $33 this afternoon, consider the buy signal confirmed in this $14 billion utility stock.
Relative strength, down at the bottom of FirstEnergy's chart, adds some extra confidence to the breakout that's being tested today. Our relative strength line has initiated an uptrend in the last three months, indicating that FirstEnergy is outperforming the broad market right now. As long as that relative strength uptrend remains intact, so does this stock's outperformance. As with Entergy, the 50-day moving average is a logical place to park a protective stop below in the FirstEnergy trade.
It's been a rough year for shareholders in Brazilian energy company CPFL Energia (CPL - Get Report) . In the last 12 months, this mid-cap utility stock has lost more than a third of its market value, touching 52-week lows just a couple weeks ago. But that doesn't mean that you should avoid CPFL Energia right now – shares are looking "bottomy" in the long-term. And a sharp rebound in the last week means that this stock is closing in on a key breakout level up at $9.
Since the start of last fall, CPFL Energia has been forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The double bottom in this stock is formed by a pair of price troughs that bottom out at approximately the same level. The buy signal comes on a push through the peak that separates those two swing lows; for CPFL Energia, that's the previously mentioned $9 resistance level.
Momentum, measured by 14-day RSI at the top of CPFL Energia's chart, is the side-indicator to watch in this stock. Our momentum gauge made slightly higher lows on each of the two price lows in shares, a bullish divergence that indicates buying pressure is quietly building beneath shares. If buyers can muster the strength to push CPFL Energia above $9, then this stock becomes a high-probability buy.
Good news: You don't need to be an expert technical trader to figure out what's been going on in shares of Otter Tail (OTTR - Get Report) lately. Instead, shares of this small-cap electric utility stock have been working their way higher in a price pattern that's just about as simple as they get. Put simply, Otter Tail has been a "buy the dips stock" since the end of this summer -- and shares are bouncing off of a buyable dip this week.
Since shares bottomed back in July, Otter Tail's stock price has been making its way higher in a well-defined uptrend. The uptrending channel in shares is formed by a pair of parallel trendlines that have identified the high probability range for shares to stay stuck within -- every test of trendline support has provided a low-risk, high-reward buying opportunity. And shares are bouncing off of support for a seventh time coming into this week. From here, it makes sense to buy the latest bounce.
Actually waiting for this week's 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 a bounce to happen first, you're ensuring Otter Tail Corp. can actually still muster buying pressure along that line before you put your money on shares.
Last up on our list of breakout utility stocks is Southwest Gas (SWX - Get Report) . Southwest Gas has been a volatile stock in recent months -- shares ended the year in a sharp correction, dropping almost 20% between the end of October and the middle of December. And this stock has been rebounding just as hard in the last six weeks. But there's some important content to that back-and-forth price action: Southwest Gas is breaking out of a classic reversal pattern this week.
Since this past fall, Southwest Gas has been forming an inverse head and shoulders pattern, a bullish reversal setup that indicates exhaustion among sellers. The inverse head and shoulders pattern is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through Southwest Gas' neckline -- that's currently at the $58 level that got taken out with Friday's rally.
Shares managed to spend Monday's entire session above $58, confirming the breakout in shares and giving traders a clear buy signal. If you decide to be a buyer in this natural gas utility, it makes sense to park a protective stop just below its right shoulder at $55. If that $55 level gets violated, then the pattern is broken and it's time to cut your losses. Otherwise, shares look likely to re-test prior highs at $62 in February.