Lights Out for Utilities?

By Jim Farrish | August 26, 2008 | 2:52 PM | 1 Comment

The outlook for a break below key support is growing and that bodes negative for the sector. A glance at the weekly chart shows a classic head and shoulder formation that is testing support of the neckline. Momentum is negative as relative strength is below 50 and stochastic is below 20. Technically speaking the index is in trouble. 460 is the line in the sand and a break would open the way to 382 as the next level of support. Whenever looking at technical indicators it is important to understand that patterns are nothing more than consolidation periods from which the previous trend will continue or a new trend will result. The key is to let the trend tell you versus guessing which way it is going. In other words don’t cheat your way into a position.

Stepping closer to the daily chart we see the support at 460 and an attempted bounce of the two week base. No conclusions as of yet, but putting this on your watch list in worthwhile. The break lower would open the opportunity to play the sector short with a target of 382 (20% decline) or a follow through on the bounce off support could produce a rally back towards the 200 day moving average (7.5% rise). Both are worthy of playing technically. If you are willing to accept the risk of a leveraged short play, ProShares UltraShort Utilities (NYSE: SDP) is available as well. Be aware these ETFs are leveraged and adjust your size according to the risk you are willing to accept. 

XLU, SPDR Utilities ETF chart shows the same pattern on both the daily and weekly charts. This would be the best match for any plays that develop. Scanning through the stock in the index, Public Service Enterprise (NYSE: PEG) and Florida Power & Light (NYSE: FPL) have similar patterns to the overall index. The electric utilities is where the weakness resides currently.

Insiders Buying I would agree that the utility sector looks rather toppy, and that the risk is to the downside. However, at the sector level, insiders at utility companies are buying shares to a very extreme degree. This data comes from www.InsiderScore.com. Although the insider trading data is limited as it only goes back to 2004, it tends to shed a point of light on true oversolds v. an oversold that is only going to get worse and more oversold. Like most sentiment data, the insider buying and selling works about 80% of the time within a reasonable period of time. Indicators such stochastics and the dreaded head and shoulders top have very little predictive value and only tend to confuse those who use these tools. Is it a buy or do we need to wait for confirmation? Even though utilities look rather toppy, I would rather be buying when those who know most about their industry are buying. For me this represents a trade as the over riding technical picture does appear to be bearish. I am long XLU (at $37) and it is my expectation the XLU will trade back to 40. Submitted by Guy Lerner on Wed, 2008/08/27 - 11:12am » reply |