Shareholders of companies from across the solar energy sector have had a turbulent ride over the past couple of years. Hype around alternative energy, the challenges surrounding corporate profitability, and shifts in investor risk tolerance have combined to create a segment of the market that is preferred by followers of technical analysis and short-term momentum trades rather than those who follow the underlying fundamentals.
Recent price action is now suggesting that this sector is setting up to make another surge higher. We'll take a look at three charts from across the sector and try to determine how traders will position themselves to make the most of the move.
Invesco Solar ETF (TAN)
Traders looking to gain exposure to the broad solar energy sector often turn to exchange-traded products such as the Invesco Solar ETF (TAN). Fundamentally, the ETF comprises 22 holdings from across the sector and carries a reasonable management fee of 0.50%.
As you can see from the chart below, a well-formed ascending triangle pattern has formed over the past several months. The recent breakout on higher-than-average volume suggests that the bulls are in clear control of the momentum. Based on the pattern, active traders will most likely look to set their short-term target price near $29, which is equal to the entry price plus the height of pattern. To maximize the risk-to-reward ratio, traders will most likely set their stop-loss orders below $25.31, which is equal to the support of the nearby 50-day moving average.
First Solar, Inc. (FSLR)
In all likelihood, the majority of the attention from active traders toward solar stocks over the coming days will be aimed at First Solar, Inc. (FSLR), which is the company that also represents more than 10% of the TAN portfolio.
Taking a look at the chart, you'll see that the price is currently trading near the top end of a horizontal channel pattern. If traders use the breakout on the chart of TAN as a leading indicator, a close above the dotted resistance could act as a catalyst for a sharp move higher. Based on the pattern, target prices will most likely be set near $70, which is equal to the entry point plus the height of the pattern. Stop-loss orders will likely be placed below $59.31, the dotted trendline, or the 200-day moving average, depending on risk tolerance.
SolarEdge Technologies, Inc. (SEDG)
Another top holding of the TAN ETF that could be worth a closer look is SolarEdge Technologies, Inc. (SEDG). Based on the pattern below, the break beyond the resistance of the dotted trendline on extremely heavy volume is a clear indication that the bulls are in control and that the momentum is likely to continue.
The sharp rise in the slope of the 50-day moving average suggests that the fundamentals are shifting and that this could mark the beginning of a major leg of a long-term shift higher. Some traders may want to wait for a reversion to the 50-day moving average in order to capture a more lucrative risk/reward setup. On the other hand, longer-term traders may want to add to their positions at current levels in order to capture a continued spike in the interest toward SolarEdge and others in the sector.
The Bottom Line
Solar companies have traded in an extremely volatile fashion over the past couple of years. However, the recent price action, bullish chart patterns, and shifts in investor sentiment seem to be combining in a way that is presenting excellent trading opportunities for those who follow technical analysis.
At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.