The Dow Jones Utility Average (DJUA) is testing November 2017's all-time high at 779 and could break out in the coming months, entering a strong uptrend. That rally would surprise skeptical market watchers who expect this sleepy sector to underperform due to the market's growing risk appetite. It would also tell sidelined investors to take a closer look at yield plays as we exit the second decade of the 21st century.

The rally is unfolding despite a bankruptcy filing by DJUA component Pacific Gas and Electric Corporation (PCG) in response to potential liabilities incurred during destructive California wildfires. That stock's market cap has plunged with price in recent months, suggesting that the index would be trading much higher if PG&E weren't one of just 15 components. This also suggests that other components are picking up the slack, exhibiting relative strength that may continue for months or years.

NextEra Energy, Inc. (NEE), Duke Energy Corporation (DUK) and The Southern Company (SO) top the utility sector's performance list, but NextEra is the only member of the trio now trading at an all-time high. NextEra currently pays a 2.66% forward annual dividend yield, compared with Duke's 4.14% and Southern's 4.75%. At first glance, Duke Energy stock shows the greatest potential upside after it spent the past four years sitting on top of the 2001 high in the mid-$80s.

DJUA Long-Term Chart (1987 – 2019)

Long-term chart showing the performance of the Dow Jones Utility Average (DJUA)

The average topped out near 225 in 1987 and spent the next decade testing resistance, finally breaking out in 1997 and entering a healthy uptrend that ended above 400 in the fourth quarter of 2000. That marked the highest high for the next five years, ahead of a steep downturn that found support in the 160s in October 2002. The subsequent bounce completed a V-shaped pattern and breakout in 2006, reaching a new high at 556 in January 2008.

The average plunged during the economic collapse, finding support in March 2009 at the .618 Fibonacci retracement of the five-year uptrend, and turned higher into the new decade. Limited buying interest kept the average below the 2008 peak until a 2014 breakout that exhibited little upside, basing on top of new support for nearly two years. The subsequent uptick posted two higher highs into November 2017 and eased into a sideways pattern that remains in force nearly 16 months later.

The monthly stochastics oscillator crossed into a sell cycle in September 2018 and turned higher in February well above the oversold level, exhibiting unusual strength. It has lifted back into the overbought zone but is showing no signs of rolling over, predicting that sector strength may continue into the third quarter. Meanwhile, price action has been contained within a rising channel since 2014, predicting that a breakout will reach channel resistance now rising from 840.

DJUA Short-Term Chart (2017 – 2019)

Short-term chart showing the performance of the Dow Jones Utility Average (DJUA)

The on-balance volume (OBV) accumulation-distribution indicator lifted above resistance at the December 2017 high in January 2019 and is now trading at an all-time high, reflecting bullishness that favors higher prices. However, straight up price action since December is generating short-term overbought technical readings that favor a shakeout of weak hands before additional upside.

In addition, the rally has now completed a 100% retracement into the 2017 high, marking a resistance level that may trigger a reversal, allowing the utility average to build a more durable breakout pattern. In turn, downside may target the 50- and 200-day exponential moving averages (EMAs), currently rising between 725 and 740. This vulnerability suggests that sidelined investors should wait for lower prices to build positions in index components or funds, rather than chasing the upside.

The Bottom Line

The Dow Jones Utility Average has reached resistance at the 2017 high and could break out in the coming months, but short-term technicals now favor a pullback.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.