The utilities sector is often looked to by active traders for its relative stability when compared to other sectors. Strong levels of recurring revenue combined with high barriers to entry also make this group one of the go-to sectors for long-term investors. Unsurprisingly, sectors such as technology and health care have dominated the headlines in recent weeks, but chart patterns across the utilities sector, such as those discussed below, are suggesting that prices could be headed higher over the final weeks of 2020.

Key Takeaways

  • Nearby support levels across the utilities sector are creating well-defined setups for active traders.
  • The recent uptick in momentum has triggered bullish crossovers between long-term moving averages.
  • Charts of the Utilities Select Sector SPDR Fund (XLU) and several of its top holdings suggest that the sector is in the early stages of a long-term uptrend.

Utilities Select Sector SPDR Fund (XLU)

Active traders interested in niche market segments often turn to exchange-traded products such as the Utilities Select Sector SPDR Fund. As you can see from the chart below, the stock price faced serious resistance from its 200-day moving average over the past several months. The period of consolidation near the influential resistance level has helped form defined trading ranges shown by the dotted trendlines. These dotted trendlines are the levels where most trend traders will likely place buy and stop orders.

Followers of technical analysis will also want to note that the uptick in momentum has also triggered a bullish crossover between the 50-day and 200-day moving averages. This common long-term buy signal is often used to mark the beginning of major uptrends. From a risk-management perspective, buy orders will most likely be placed as close to current levels as possible, and then stop-loss orders will likely be placed below $59.46 in case of a sudden shift in fundamentals or market sentiment.

Chart showing the share price performance of the Utilities Select Sector SPDR Fund (XLU)
StockCharts.com

Understanding the direction of an underlying trend is one of the most basic ways to increase the probability of making a successful trade because it ensures that the general market forces are working in your favor.

Dominion Energy, Inc. (D)

As one of the top holdings of the XLU ETF, Dominion Energy, Inc. (D) will likely be the focus of active traders over the weeks ahead. Looking at the chart below, you can see that the price has been stuck within a defined range for the past several months.

It is interesting to note that the bulls have recently shown interest, and the price has started to move away from long-term support. The recent divergence between the long-term moving averages suggests that the momentum is in the favor of the bulls and that we could be in the early stages of a major uptrend. Buy orders will likely be placed as close to current levels as possible, and stop-losses will likely be placed below $78.94 in case of a sudden pullback.

Chart showing the share price performance of Dominion Energy, Inc. (D)
StockCharts.com

Sempra Energy (SRE)

Another top holding of the XLU ETF that could capture the attention of traders over the weeks ahead is Sempra Energy (SRE). Looking at the chart below, you will notice a similar pattern to the others shown above.

The period of consolidation over the summer months combined with the bullish signals in recent days suggest that we are in the early stages of a move higher. Again, stop-loss orders will most likely be placed below the nearby support level at $124.50 to protect against a sudden shift in underlying fundamentals.

Chart showing the share price performance of Sempra Energy (SRE)
StockCharts.com

The Bottom Line

While most of the market attention has gone to companies in the technology and health care sectors, the slow-and-steady nature of the utilities sector suggests that this group could be the one to watch over the final weeks of 2020.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.