Solar Stocks Are Heating Up

Solar stocks are recovering from major sell-offs over the past few years, recently completing major bottoming patterns and signaling that a longer-term uptrend could be under way. While some of these stocks remain in basing patterns, others have already surged higher. Therefore, each stock will require a slightly different game plan for traders who wish to get involved.

SunPower Corporation (SPWR) stock is in a long-term downtrend going back to the 2014 high of $42.07. That long-term downtrend should be kept in mind, but the price could still make significant upside progress, especially considering the basing pattern that is playing out right now. Over the past year, SunPower stock has been forming a rounded bottom, and since April, it has started making consecutive higher swing lows and higher swing highs. (See also: SunPower Q2 Losses Narrower Than Expected, Sales Fall.)

While the price did fall sharply on Aug. 2, and there may be more short-term downside, the overall trajectory is up. Possible buying locations include the rising trendline, which intersects near $8.50. Based on the short-term downward momentum, reaching that $8.50 to $8.00 area is probable, yet in light of the broader strength, it could be a good entry point. If the price continues to drop below $7.50, that is a warning sign that the broader move to the upside is in trouble and does not have enough buying interest behind it. However, if the price continues its uptrend, the next targets are $13 and $14.50. Traders could exit a portion of their position at each level, implement a trailing stop-loss at the first, or pick one level or the other as an exit point.

Technical chart showing SunPower Corporation (SPWR) stock forming a basing pattern and rallying to the upside

Canadian Solar Inc. (CSIQ) has also been forming a bottom after a long-term decline. A volatile rounded bottom has been forming for more than a year, with the price making higher swing highs and lows since April. In July, the price hit a 52-week high of $18.12, and as of Aug. 8, the price is slightly below that. The past year has been marked by strong moves up and down, so buying near a high may not be the most prudent play based on the stock's tendency. (For more, see: Rounded Bottom Could Mean a Rally for These Stocks.)

Since Canadian Solar stock tends to see sharp corrections after a rally, getting a lower entry point is quite possible. The rising trendline that intersects near $13.50 is one spot to look for an entry. An entry signal could include the price falling to near (it could be slightly above or below) the trendline and then consolidating for several sessions. If the price then breaks out of the consolidation to the upside, that is a buy signal. If the price falls below $12, the uptrend is in trouble, and the technical premise for the trade is no longer valid. If the uptrend can regain its legs (after a pullback), upside price targets include $21 and $23.

Technical chart showing Canadian Solar Inc. (CSIQ) stock forming a basing pattern after a long-term decline

JinkoSolar Holding Co., Ltd. (JKS) has been one of the strongest solar stocks year to date, up 87%. Jinko stock is pushing into price levels not seen since 2015. This stock exhibited the same pattern that is playing out in Canadian Solar and SunPower, but in the case of Jinko, the higher lows and highs started forming a couple of months earlier. (See also: JinkoSolar to Supply Solar Modules for Fuji Electric Project.)

With the price having already rocketed up and earnings just around the corner (Aug. 23), this is a tough time to justify buying. The stock has already hit its profit targets based on the rounded bottom and is approaching some strong resistance from 2015. If the price declines back below $25.50, traders should be careful. With the stock near resistance, a move below $25.50 could mark the start of a steep decline.

Technical chart showing JinkoSolar Holding Co., Ltd. (JKS) stock spiking after completing a bottoming pattern

The Bottom Line

Right now, these solar stocks are looking good. Even with the recent weakness in SunPower, the broader uptrend remains in play. However, an uptrending stock still requires buying at a price that is acceptable given the risk and profit potential. Since any trend can turn, it is important to cap risk and exit a trade if the original premise for the trade is no longer valid. The risk, or the difference between the entry and stop loss, helps determine if the trade is worth taking from a risk/reward perspective. No matter how good a trade looks on paper, traders should risk only a small portion of account capital on any single trade. (For related reading, check out: A Surprisingly Sunny Run for the Solar ETF.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the stocks mentioned.