The Strongest Sector Can Still Go Higher

12/16/2011 10:56 am EST


Thomas Aspray

, Professional Trader & Analyst

The utilities sector has surprisingly outperformed all others this year, and recent price and volume action in the primary sector ETF and select stocks indicates more potential upside ahead.

With only a couple weeks left in the year, there is little debate that it has been a rough year for most stock investors, and virtually no one thought that the utilities sector would be the strongest sector for the year.

As of Thursday’s close, the Select Sector SPDR - Utilities (XLU) is up 10.47% compared to the 2.73% decline in the Spyder Trust (SPY), which tracks the S&P 500. In total, XLU has outperformed SPY by 13%.

The strong historical pattern for the third year of the presidential cycle still allows for a positive close in the S&P 500 this year, but utilities will remain the best sector. In fact, the recent positive action in XLU and the bullish volume patterns in two utility stocks indicate that further gains are likely as we head into 2012.

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Chart Analysis: The Select Sector SPDR - Utilities (XLU) declined briefly to test support just above $33 before rallying back to strong resistance in the $35.32-$35.47 area.

  • The long-term chart of the sector illustrates the value of basic chart analysis, as the uptrend from the 2009 lows held, even on the sharp decline last August

  • The upper boundary of the trading channel is now at $36.25, which also corresponds to the 127.2% Fibonacci retracement target. This is about 3.5% above current levels

  • Weekly relative performance, or RS analysis, turned positive last May and then broke through its long-term downtrend (line c) at the end of July

  • The RS line has moved up sharply in the past two weeks, which is positive

  • On-balance volume (OBV) also looks very bullish and has broken out to new highs (line d) while acting stronger than prices

  • There is minor support at $34.60-$34.80 and stronger support at $34

Constellation Energy (CEG) has been under a cloud for some time because of the controversy over its merger with Exelon. On Thursday, an apparent settlement with the State of Maryland was announced. CEG has a current yield of 2.50%.

  • The daily chart of CEG shows a solid long-term uptrend, line f, and the stock held up well during the November decline

  • The flag formation on the daily chart has upside Fibonacci targets in the $41.80 area

  • The weekly downtrend in the relative performance, line g, will be overcome this week

  • CEG has been outperforming the S&P 500 since last summer, as indicated by the uptrend in the relative performance, line h

  • Volume was very heavy on Thursday, but the OBV did hold support (line i) on the recent decline

  • There is initial support now at $38.60-$39.20 with more important support at $37.81 and the November lows

NEXT: International Utility with More Room to Run   |pagebreak|

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Companhia Energetica de Minas Gerais (CIG) is the largest combined generator and distributor of electric power in Brazil. It has a market capitalization of $12 billion and pays a current yield of 6.1%.

  • It peaked in July at $21.06 and violated its uptrend (line b) in August before dropping to a low of $14.03 in October

  • This low corresponded to the June 2010 low, and CIG has since rebounded sharply. It looks ready to close above the prior eight-week highs with next resistance at $19.00

  • If the July highs are overcome, there is trend line resistance at $22.75

  • The RS line held long-term support at line d and is now rising strongly

  • The weekly OBV held up much better than prices on the recent decline, holding support at line f

  • OBV has broken its downtrend, line e, and is now leading prices higher

  • There is initial support at $17-$17.40 with stronger support at $16.30-$16.50

What It Means
: The recent technical action in the utilities sector ETF XLU and these two stocks is positive, suggesting that those not satisfied with the current low money-market yields could consider a move into the utilities sector.

How to Profit
: For the Select Sector SPDR - Utilities (XLU), go 50% long at $34.86 and 50% long at $34.52 with a stop at $33.56 (risk of approx. 3.3%).

For Constellation Energy (CEG), go 50% long at $39.56 and 50% long at $38.94 with a stop at $37.72 (risk of approx. 3.9%).

For Companhia Energetica de Minas Gerais (CIG), go 50% long at $17.72 and 50% long at $17.24 with a stop at $15.96 (risk of approx. 8.7%).

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