First Solar, Inc. (FSLR) makes solar panels and is a pure play on technical momentum, as the company has an elevated P/E ratio of 318.24 and does not offer a dividend, according to Macrotrends. The stock was nearing its risky level for August at $69.48, setting its 2019 high of $69.24 on Aug. 1. This was reason enough to reduce holdings ahead of earnings.
The company recorded a second quarter loss, which caused a hiccup in the share price, but the downside was muted as First Solar maintained its full-year earnings guidance. Baird reiterated its outperform rating for the stock, noting that the earnings miss was caused by higher-than-expected taxes. UBS reiterated its buy rating and raised its price target on First Solar shares to $80 from $73. JPMorgan also upped its price target to $82 from $74.
I show a quarterly risky level for First Solar shares at $73.92. The stock closed Friday, Aug. 2, at $66.63, up 56.9% year to date and in bull market territory at 82.5% above its 52-week low of $36.51 set on Oct. 29.
The daily chart for First Solar
The daily chart for First Solar shows the formation of a "golden cross" on March 13, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. Note that the stock held its 50-day simple moving average at $50.97 on March 26.
The close of $65.68 on June 28 provided an important input to my proprietary analytics. The stock's semiannual value level is $39.78, with monthly and quarterly risky levels at $69.48 and $73.92, respectively. The 50-day and 200-day simple moving averages ended last week at $63.60 and $53.47, respectively.
The weekly chart for First Solar
The weekly chart for First Solar is positive but overbought, with the stock above its five-week modified moving average of $64.52. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $51.34. The 12 x 3 x 3 weekly slow stochastic reading slipped to 83.24 last week, down from 84.72 on July 26. This stock had been what's called a high-flyer. Its five-year high is $81.72, set in April 2018. Its all-time intraday high of $317.00 was set in May 2008.
Trading strategy: Buy First Solar stock on weakness to its 200-day and 200-week simple moving averages at $53.47 and $51.34, respectively, and reduce holdings on strength to its monthly and quarterly risky levels at $69.48 and $73.92, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.