Technical Analysis: Water stocks get a soaking

24th Jul 2009 16:06

This week's decision by Ofwat to propose cuts in water bills between 2010 and 2015 has seen the publicly quoted shares in the water sector take a hit.The fear is that the companies' profitability will be hit as the regulator has stipulated that the planned £21bn of investment will not be affected by these stipulations. The water companies had asked for a more generous deal from the regulator to reflect the tougher economic climate and help pay for the infrastructure improvements.This is because they require at least a 4.5% return on their capital to maintain their dividend payments and due to the levels of debt carried by United Utilities and Severn Trent, there is a concern that they may be forced to cut their dividends, or as some analysts have speculated, look to raise capital by way of a rights issue.This deal was not forthcoming and as such the sector has been subject to a sell-off. As can be seen from the above graphic the sector has sold off from trend line resistance level around 3,654, but is still significantly above its lows of April and July.As a more defensive sector it has significantly underperformed the FTSE since the lows posted in the benchmark index in March.However, unlike the benchmark index it has not lost anywhere near the value sectors like mining and banking have lost over the last 2 years. Northumbrian Water: since its October peaks of 337.50p, this stock found a base around the 205p area in March and April, and since then has found support in a sideways range of 230p support, to resistance around 260p. Pennon Group: the owners of South West Water have since the beginning of March managed to put in a fairly good performance, rallying from lows of 372p to be trading at 6 month highs of 511p on Wednesday. The decline on Thursday to around 485p is no more than short term profit taking after a fairly lengthy up trend and there is trend line support at 463p, from the lows at 372p. This level needs to hold for the gains to continue.Severn Trent: the key level for Severn Trent is at the March lows of 943p where there is double support as well as 4 year lows. Any move below these levels would be a cause for concern. Over the past 6 weeks the stock has dropped from highs at 1,200p which acted as resistance in May and June. With the brokers evenly split on this stock between buyers and sellers, it is worth keeping a close eye on.United Utilities: The largest faller of all the water utilities over the past 2 years, it was trading just below 800p in late 2007, making a 10 year low of 450p in the declines of March this year. To date it has only managed a modest bounce to 566p before drifting back. A break of 450p would be negative for this stock and could well herald a deeper move to new lows. It would need a break above 507p trend line resistance to stabilise the downside pressure. With the brokers also evenly split on this stock it is also worth keeping a close eye on the price action, especially around the lows.For periodic TA updates follow me on TwitterAlso read my Investors Guide to Technical Analysis and Level 2