This Stock is Heating Up

The darkness is dispelling, and light is beginning to shine forth. So says the chart of First Solar, Inc. (NASDAQ:FSLR), which has improved dramatically over the past quarter.

Indeed, solar stocks large and small are shedding their bearish ways and beckoning to buyers to come and participate in newfound strength.

As I’ll soon articulate, FSLR stock now boasts some of the best technical patterns we’ve seen in over a year.

Is the long night for solar stocks finally over?

Or is this a ruse, a nasty trap just waiting to bit overeager bulls?

I suspect it’s the former, but one can never be quite sure.

Which, on a side note, is why risk management is paramount, and contingency plans are a must for traders seeking long-term survival.

Bulls Are Getting TAN Once More
In building our bullish case for FSLR stock, let’s first explore the broader solar sector to illustrate how Wall Street is warming to the entire space.

We’ll use the Guggenheim Solar ETF (NYSEARCA:TAN) as a proxy for the sector. First Solar, Sunpower Corp (NASDAQ:SPWR), Canadian Solar (NASDAQ:CSIQ), and Sunrun Inc (NASDAQ:RUN) are among the fund’s top holdings.

TAN has been wandering in bear country for years. Its behavior has been so one-sided, so obviously terrible, that bulls have long since abandoned the space. With the rest of the stock market skirting the stratosphere, there have been virtually zero reasons to even bother with solar stocks — at least to the long side.

But, as I said, TAN seems to have turned over a new leaf.

Let’s start with price performance. Year-to-date, TAN is up 19.3%. And while that pales in comparison to some of the highflying tech stocks, it’s one of the best first-half returns the solar sector has seen in years.

Source: OptionsAnalytix

What’s perhaps more compelling is the improved technical posture. TAN now sits north of the 200-day moving average for the first time in two years. Its latest ascent was powerful enough to carry the RSI indicator to its highest reading over the same time frame.

Volume patterns are also lending credibility to the bulls here. A slew of accumulation days have cropped up over the past month signaling institutions are once again entering the fray.

FSLR Stock Charts
The price action of First Solar has mirrored that of its sector, which makes sense on two levels.

First, stocks boast a strong correlation with their respective sectors. FSLR isn’t a lone wolf. It moves in sympathy with the pack. Second, ETFs, like TAN, are nothing more than the sum of their parts. And guess which security is the biggest part of TAN? That’s right, First Solar. Currently, it holds an 8.73% weighting in the fund.

Source: OptionsAnalytix

Just about every bullish item mentioned for the broader solar sector applies to First Solar’s price chart. Of particular interest is last week’s light-volume pullback, which is providing a lower risk entry for buyers. Friday’s up day confirmed a new pivot low.

If the strength continues Monday and FSLR is able to rally above Friday’s high ($39.56), then consider initiating bullish positions.

Hot Money Comin’ At Ya!
As usual, the options market provides many ways to capitalize on First Solar’s nascent uptrend. With an IV Rank of 42%, I’m favoring short premium plays here. Couple that with its relatively low price tag, and a naked put trade should do the trick.

Sell the Aug $35 put for 90 cents or better. Essentially this is a bet that FSLR stock will sit above $35 at expiration. The reward is limited to the initial 90 cents. By selling the put, you are obligated to buy 100 shares of stock at $35 if the put sits in-the-money at expiration.

If you’d prefer to sidestep assignment, then close the trade if FSLR drops below $35.

— Tyler Craig

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Source: Investor Place