#$pui

Utility stocks have been conforming very reliably to charting analysis; if that trend continues, the chart says they better stop dropping now.

We’ve discussed in the past that most technicians or chartists have a handful of stocks, indices, tickers, etc. that never seem to behave the way they’re “supposed to” according to the analysis. For me, one such miscreant has always been utilities stocks -- the Dow Jones Utility Average, to be precise. The DJU always seemed to zig when I thought it should zag, and vice versa. For that reason, its recent behavior has been exceedingly interesting. That’s because, for about the past 6 months, the DJU has behaved exactly how our technical road map would suggest it should.

It started in March when the DJU began a healthy 12-week consolidation at the level of its January 2015 all-time highs near the mid-650′s. That was followed by a textbook breakout to new highs. The breakout would see follow-through into early July, when we noted on Twitter and StockTwits (follow us on both: @JLyonsFundMgmt) that the DJU rally was hitting the vicinity of 2 noteworthy Fibonacci Extensions in the mid-720′s. Specifically, they were the 161.8% Fibonacci Extensions of the two most significant DJU declines of the past decade, in 2008-2009 and 2015. Indeed, the rally would peter out at 724.

In the subsequent decline, we began posting about how the DJU was precisely following the technical “road map” laid out by its chart. In an August post, we indicated that the latest signs on this map appeared to be pointing to a test of the former breakout level. Specifically, we said that if “the index holds above 670-ish, the road should lead higher. Although, a detour toward the low-650′s level that marked the breakout of the January 2015 highs would not be a shock.” The index would bottom out at 656 in the early-September selloff.

In the mid-August post, we noted that “on the upside, the index may run into a roadblock in the low-700′s”. A week ago, the DJU reached nearly 699 before being turned back forcefully. As of this morning, the index had dropped 6% and was back down testing the ultra-important 655 area again. In our view, it best be bouncing here.

As the chart indicates, not only does this 655 area signify the breakout level, it is also represented (not surprisingly) by several other key levels. These include:

The 23.6% Fibonacci Retracement of 2012-2016 Rally

The 38.2% Fibonacci Retracement of 2015-2016 Rally

The 200-Day Simple Moving Average

This is pretty substantial support for the DJU in the 650′s. If it can hold, this 2nd “re-test” of the breakout area could offer a green light for a more durable up-leg in utilities. On the other hand, should the area fail to hold, all this action of the past 6 months may prove to be nothing more than a false breakout. In that case, the road signs may as well say “Bridge Out”.

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Utility stocks have been unusually responsive to key chart levels recently.

As money managers who rely quite a bit on the charts, it’s always comforting to work with securities and data series that conform reliably to charting analysis. On the other hand, most chartists can probably think of a handful of tickers that never quite seem to do what they’re “supposed to”. One of my charting nemeses has always been the utility sector, specifically, the Dow Jones Utility Average. For whatever reason, the index has always seemed to zig when I thought it would zag, and vice versa. However, the tables have turned in 2016 as utilities have closely followed the “map” as far as conforming to standard charting practices. Thus, the sector has been pretty good to us this year -- and many others, no doubt (though admittedly that fact has me a bit nervous).

One example of the sector’s conformity dealt with its breakout, and subsequent tests, that we noted back in early April. The near textbook breakout launched the utilities on a tear that would cement the sector as the star of the first half of the year. It would be a very different story as the second half began, however, as the utility sector immediately topped out. Again, though, the charts gave us an accurate head’s up of a potential stalling out by the sector.

We’ve written many times about Fibonacci analysis in these pages. Once again, it is a mathematical sequence of numbers that appears in all walks of nature and elsewhere, including the markets. On July 5, we posted a chart on Twitter and StockTwits (follow us on both: @JLyonsFundMgmt) showing how the Dow Jones Utility Average was in the vicinity of 2 noteworthy Fibonacci Extensions. These Extensions refer to a magnitude of gain that will often contain prices, based on the size of a correction or trading range from which they have emerged.

For example, the 2 most noteworthy corrections in the Dow Utilities over the past 10 years occurred from 2008-2009 and from January-September 2015. If one calculates 61.8% (i.e., the result of dividing one Fibonacci number by the next in the sequence) of the height of each correction range and adds it to the top of the range, the result is the 161.8% Fibonacci Extension of the range. As it turns out, the 161.8% Extension of the 2008-2009 decline is at approximately 720. Similarly, the 161.8% Extension of the 2015 decline lies at approximately 730.

Thus, when the Dow Utility Average was approaching, or hitting, that vicinity, it was suggested that the rally may at least soon pause for a breather. And indeed, the index would peak on July 6 at 724.

Here’s a closer look at the action of the past year and a half.

You may notice at the far right of the chart that prices finally did bounce over the past 2 days. The bounce also occurred according to the charting road map. Specifically, the index dropped back to the level from which it broke out (~670) back in early June. And on cue, utility stocks bounced some 3.5% off of Wednesday’s test of the breakout level.

So where does the map go from here...and will utilities continue to follow it? Well, a chart can certainly serve as a fine map, but it is not a crystal ball. As far as adhering to the map, we will continue to play the Dow Utility Average as if it will be respectful of the charting signs along the way, as it has recently.

That means that, as long as the index holds above 670-ish, the road should lead higher. Although, a detour toward the low-650′s level that marked the breakout of the January 2015 highs would not be a shock. On the upside, the index may run into roadblocks in the low-700′s and at the highs around 724. And if the index is going to break out of this recent range, in either direction, it will likely take, as the sign in the photo says, some serious work ahead by the utilities.

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