The major stock indexes took a pummeling last week over fears that interest rates are rising too quickly. The Dow Jones Industrial Average (DJIA) gave up a cumulative 1,300 points or roughly 5% on Wednesday and Thursday before recovering slightly in Friday trading.
Surprisingly, the utilities sector, which typically moves lower when interest rates rise due to higher funding costs, has outperformed the broader market in October 2018. While the Standard and Poor's 500 index (S&P 500) is down 5% so far this month, the Vanguard Utilities ETF (VPU) – the poster child of U.S. utilities exchange-traded funds (ETFs) – is trading flat to slightly higher over the same period, and the ETF is up 6.14% over the past three months.
Many fund managers believe that the market is prioritizing the status of the utilities sector as a safe haven during the October stock sell-off. "'In a market like this, in a dramatic sell-off, the rotational effects will be higher than the interest rate effect,' said Jay Hatfield, portfolio manager at Infrastructure Capital Management," according to a CNBC article.
Let's analyze the charts of the Vanguard Utilities ETF's top three holdings to determine if the fund is likely to continue rising and to provide trading ideas for those who wish to trade its largest holdings.
NextEra Energy has formed a broad ascending triangle, which is a bullish chart pattern, throughout most of 2018. As of early October 2018, the stock is likely to find support on the clearly defined uptrend line at the $166 level. Traders seeking an entry point may find confluence from the relative strength index (RSI) if it nears 30 as NextEra Energy's share price approaches the trendline. A stop-loss order could be placed slightly below the uptrend line or below the 200-day moving average for more wiggle room. Traders who want confirmation of a breakout should wait for the stock price to move above key resistance at $174.50 before entering.
A textbook double bottom was confirmed when Duke Energy's stock price broke above the pattern's swing high at $79. This level is now acting as support, with buyers stepping in on a retracement to this price in late September 2018. The bulls would also have noticed that the 50-day moving average crossed above the 200-day moving average in mid-August, in what technical analysts call a "golden cross." The stock appears to be finding support on the uptrend line that commenced in early June. Further retracements back to the $79 support level look to be a high-probability buying or accumulation area. Traders can protect their capital by setting a stop-loss order just below the 200-day moving average.
The turning point in Dominion Energy's share price occurred when it broke above a seven-month downtrend line in mid-June 2018. Since that time, the stock has rallied back above its 200-day moving average and consolidated in a $5 range since early August. Dominion's chart has also formed a broad inverse head and shoulders or rounding bottom pattern throughout 2018, which suggests further upside momentum. Traders who are looking for a suitable entry point should wait for a retracement to the uptrend line that corresponds with the $70 level as of mid-October. This area should find additional support sitting midway between the 50- and 200-day moving averages. Traders can place a stop slightly below the longer-term moving average to close the trade should it move against them.
Charts courtesy of StockCharts.com.