The move in the Utility Index (UTY.X) this morning is worth a closer examination. In the 11:00 p.m. EST Intraday Update, Jeff Bailey detailed the bullish move in the index. In case you missed that piece, make sure to read it before continuing:
There are parallels between the UTY.X and the Dow Jones Utility Average ($UTIL). In fact, our observations for the UTY.X can be applied to the $UTIL. The differences between the two are subtle. The UTY.X includes four more components than the $UTIL, making the former a bit more broad and perhaps the better index to use, thus our focus on the UTY.X.
There are 19 components in the UTY.X. The components consist of power generating firms, distributors, gas and electric providers, and trading firms. Here's a list of the components:
Within the UTY.X, there's already been movement among the components that arguably foreshadowed this morning's breakout in the index. We'll take a look at one of the early movers in the group, along with two others. Each of the three components we'll examine are at different stages in the cycle. The three stocks carry unique risk, offering different trading styles a way to trade the move in the UTY.X.
TXU Corp. (NYSE:TXU)
TXU is a diversified concern with operations in the generation, purchase, distribution, and marketing of electricity and natural gas. The company is a larger concern, trading with a $14 billion market cap.
The stock is one of the strongest in the group. It broke above a quadruple-top in early February at the $50 level and has been trending higher ever since. TXU's relative strength versus the UTY.X has been positive for about one year; it really began out performing the UTY.X last September. TXU is the stock that perhaps foreshadowed the move in the UTY.X with its quad-top breakout. Quite simply, it's one of the strongest stocks in the group; a bet on TXU is a bet on the leading horse and on a belief that the UTY.X will continue higher.
American Electric Power (NYSE:AEP)
American Electric is a holding company that owns common stock of its domestic operating subsidiaries. The firm derives nearly all of its revenues from providing electric service.
In terms of absolute price action, the stock is tracking the UTY.X pretty closely. It recently broke out of a six month trading range, but faces minor congestion above at the $46 level -- a double top. The stock definitely moved above its bearish earlier this month.
In terms of relative price strength, the stock is out performing the UTY.X, making it one of the stronger components of the index.
Reliant Energy (NYSE:REI)
Reliant is a diversified international operation. Its business segments include electric operations, natural gas distribution, pipelines and gathering, wholesale energy, and European energy.
Reliant is one of the weakest components of the UTY.X, although it has reversed that trend in the recent short-term. The stock hasn't generated a buy signal in almost one year. REI is the tail of the snake. If the UTY.X continues higher as it appears it will, then REI may have some catch-up to play.
An advance past the $27 level would generate a bearish signal reversed -- one of the strongest of point and figure patterns.
Using the UTY.X as a guide, it appears that the utilities are heading higher. The price action that Jeff Bailey detailed in the earlier Intraday Update is meaningful, specifically the breakout above the triple-top and bearish resistance. Using simple pattern recognition and relative strength, readers can find opportunities within the UTY.X to suit individual risk tolerance; readers can match components with individual trading styles.