I've spent a lot more time over this past year researching, trading and investing in energy companies than I typically spend in any given year. This has been a very active industry lately, as many subsectors move in and out of play at any given time.
Currently, several Chinese solar companies are on my longer-term watch list for breakout plays, and you can learn more about them by reading my Feb. 1 column.
Nevertheless, there is also a cooling trend in the broader sector, and many companies are beginning to struggle. One of the latest companies to show signs of the bulls beginning to falter is Sempra Energy (SRE).
Sempra Energy is an energy-services company headquartered in San Diego. It is involved in the generation, transmission and distribution of electricity and also in the sale, distribution and transportation of natural gas in California. It also holds an interest in renewable energy projects in several states.
Sempra Energy may seem to be a strange choice for an article written from a "correctionist" standpoint. Nearly every analyst on record has a Buy rating on the security, and when I went to check out exactly what others are saying, I noticed that Zacks Equity Research published an article just last week that was titled "Stay Invested in Sempra." But the very title itself suggests that something is afoot. Why would one need to "stay invested" if Sempra were truly still a buy?
In this case, the charts speak for themselves. Sempra has been one of the utility darlings of the past several years. After spending several years trapped under resistance at the $56 zone, Sempra broke free at the beginning of 2012. Since then, it has been on a steady climb with barely a pause in late 2012 before the bull run continued into last year. Since May, however, that run has slowed, and this is where it becomes important to step back and look at the details.
Sempra Energy came public in the summer of 1998. It struggled for several years, but that struggle maintained an underlying bullish bias that I've written about often with regard to new IPOs. At the beginning to 2003, that bullish bias triggered the first major bull run in Sempra. That rally took the company's shares from a low of $15.50 to a high of $66.38 before it ran out of steam in the spring of 2007.
The correction that followed between 2007 and 2011 was reminiscent of its early struggles between 1998 and 2002. In fact, the price action that occurred during Sempra's second corrective phase was almost identical to its first in both time development and pattern development, as seen above.
This brings us to the current price action in Sempra Energy. The corrective phases of Sempra were nearly identical, and the follow-through has been as well. The second monthly chart of Sempra Energy details these bull moves.
While the overall momentum of this second rally is slightly stronger than the first, two very major types of price resistance have struck. The 100% expansion of the first rally from 2003 to 2007 off the 2008 lows hit around $82.74 in mid-2013. This was that exact price zone that slowed the most recent bull run and shifted the momentum of the bull trend. Then, over the past month, Sempra ran into the 100% expansion of the 2003-2007 rally when comparing only the second breakaway move from the end of 2012 onward to the first rally, which began in 2002.
When these types of measured moves occur, it is extremely difficult for a security to continue the trend. This is particularly true if the momentum of the second rally is similar to the first. In this case it was not. The second was stronger. This means that the rally will still need to deal with trend exhaustion, but the type of action that can follow may be more like the exhaustion that followed the 2013 test of the first 100% expansion.
In other words, a sharp initial correction off the resistance may still be met with slightly higher highs later on before a larger price correction occurs. However, momentum has already begun to shift on the monthly time frame due to the first exhaustion in 2013. So, this time around, that next correction on even the weekly time frame is likely to be much stronger and last longer than any corrective move seen in 2013.
On the weekly chart of Sempra Energy, I have shown in more detail how the momentum has shifted throughout the second half of 2013. The breakaway move into 2012 had two waves of upside, allowing me to add a Fibonacci Fan to project upcoming support levels on corrective moves. Notice that the 23.6%-27.2% zone has served as major support for the shifted uptrend.
Recently, after three highs, it has begun to hug that support even more tightly. This is a sign that a stronger breakdown is likely near on the horizon and that the current Fibonacci Fan support at this level will soon give way. This will provide an opportunity for short-term bears to look for breakdowns into the 38.2% and 50% fan levels shown on this weekly time frame.
These fans hold the best if there is also a retracement level striking at the same time, so I have shown two levels in time and price to indicate upcoming support and how long I expect it to take to strike. The first level could easily hit within six weeks, but the second level near $80 will likely not strike until early spring.
Even though Sempra Energy may once again offer a short-term recovery after this initial correction to the current uptrend, the longer-term bulls should watch the price action carefully and consider their time frame objectives. Over the next four years, Sempra Energy is likely to experience wider price swings more on par to the swings that took place throughout 2007-2011, even though those swings may easily still be a part of the continued uptrend.
Interestingly, while the smaller shifting trend from the second half of 2013 does give the bears a near-term advantage over the next several months, it is a better price pattern for the longer-term bulls than a stronger pivot off highs would have been, such as the one in 2007. The monthly trend channel is likely to continue to shift and slow as a result of current price action, but it gives the bulls a better chance to still see higher highs without needing to wait four years like they had to in each of the prior corrective stages.