First Solar, Inc. (FSLR) stock has posted healthy gains since bottoming out in April but now faces heavy resistance that could trigger another major downturn. Alternatively, a breakout above this significant barrier would open the door to dramatic upside that could eventually challenge mid-decade highs in the $70s. Rather than placing a winner-take-all bet, the best trading plan will be to wait and watch, letting other market players burn their capital in pursuit of the next trend wave.

The Guggenheim Solar ETF (TAN) hit bottom in December 2016, nearly four months ahead of First Solar, which is its biggest component with an 8.24% weighting. The fund is now trading above the 200-day exponential moving average (EMA) for the first time since 2015, highlighting a surprising recovery in a Trump era that favors fossil fuels over alternative energy. While there are no guarantees that the bottom will hold, sector-wide accumulation tells us that institutions are betting on higher prices in coming months. (See also: Play Politics With ETFs ... for Real.)

FSLR Long-Term Chart (2006 – 2017)

First Solar stock came public at $24.50 in November 2006 and entered an immediate uptrend that accelerated into December 2007, when it topped out just above $280. A test at that level in May 2008 attracted intense selling pressure above $300, reinforcing new resistance, ahead of a slow-motion pullback that accelerated during the economic collapse. The decline finally ended at $85 in the fourth quarter, giving way to a 2009 bounce that stalled near $200.

Developing support at $100 was tested repeatedly in the next two years, finally breaking in a profit-destroying plunge that undercut the IPO opening print in March 2012. Aggressive sellers held control into June, triggering an all-time low at $11.43, ahead of a multi-legged recovery that stalled within 25 points of new resistance in March 2014. Five months of failed breakout attempts gave way to a swift downturn that established new support at $40 at the start of 2015. (For more, see: The History of First Solar.)

That floor held through an October 2015 test, while the subsequent upturn stalled at range resistance in the first quarter of 2016. The stock turned sharply lower in the second half of the year, breaking support in November, ahead of a two-step downtrend that may have ended at $25.56 in April 2017. Price action since that time has carved a high-volume bounce that reached new resistance at $40 in May.

FSLR Short-Term Chart (2014 – 2017)

The stock built a rectangle pattern between $40 and $75 in 2014 and 2015, with multiple tests on both sides reinforcing the sideways pattern. The 2016 breakdown generated an ugly decline powered by bulls taking losses after building sizable positions in hopes of a breakout into the $80s. On-balance volume (OBV) sitting at a decade high during that period tells us that a large supply of shareholders got hurt in that downdraft. (For more, see: Is First Solar a Great Deal or a Value Trap?)

Accumulation resumed in the second quarter of 2017 but still hasn't reached the level posted in the prior year. Even so, the six-week basing pattern on top of the 200-day EMA near $36 could offer a stable platform for a breakout above resistance at $40. That bullish event would open the door to a trip up to former range resistance in the $70s, which might offer excellent profit potential for positions lasting three to six months.

The two-month price pattern has carved a series of slightly higher highs and lows, generating a small-scale rising channel. Sidelined market players can use this pattern for guidance, with a channel breakout likely to correspond with a rally above $40, while a channel breakdown through the mid-$30s would also violate 50- and 200-day EMA support, favoring a much deeper slide back to May's unfilled gap between $30.75 and $32.00. (See also: SolarCity vs. First Solar: Fierce Competition in the Solar Power Market.)

The Bottom Line

First Solar has been testing major resistance at $40 for the past six weeks, with evenly divided odds for a breakout or reversal. Given the binary setup, it makes sense to stand aside while this testing process evolves, jumping in as soon as one side or the other wins the battle. (For related reading, check out: The World's Top 4 Alternative Energy Companies.)

<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>

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