SunPower Corporation (SPWR) put an unexpected dent in bullish solar sentiment on Wednesday morning, dropping more than 10% after beating second-quarter earnings and revenue expectations while sharply lowering third-quarter guidance. The bearish news rippled through the resurgent sector, forcing newly minted shareholders to wonder if the four-month rally to 52-week highs has finally run its course.

The reversal will also force market watchers to pay close attention to the sector's narrow leadership, looking for clues that sector leaders have the power to shake off this week's bad news. Deeply oversold technical conditions that underpinned April's big turnaround are no longer in place, raising the odds it will take legitimate catalysts to keep committed buyers coming off the sidelines. (For more, see: SunPower Q2 Loss Narrower Than Expected, Sales Fall.)

Guggenheim Solar ETF (TAN) Weekly Chart (2013 – 2017)


The Guggenheim Solar ETF entered a steep downtrend after its launch in April 2008, descending in two broad selling waves that reached an all-time low at $12.60 in 2012. A bounce into 2014 stalled at new resistance generated by the 2011 breakdown through the 2009 low at $46.52, yielding a broad topping pattern ahead of a breakdown in the second half of 2015.

The furious decline found support within four points of the 2012 low on the last trading day of 2016, yielding a narrow basing pattern. Support also came in the June 2017 breakout that lifted the fund above the 200-day exponential moving average (EMA) for the first time since June 2015. The rally has now reached short-term resistance at the August 2016 swing high near $22.50, marking a good spot for a reversal and pullback that could last into the fourth quarter. (See also: Top 5 Alternative Energy ETFs for 2017.)

SunPower Corporation (SPWR) Weekly Chart (2013 – 2017)


SunPower shares ended a long downtrend at $3.71 in 2012 and entered a trend advance that stalled in the mid-$30s in 2013. The stock spent more than two years building a topping pattern with support in the low $20s and broke down in the second quarter of 2016. That decline continued for a year, dropping the stock within two and a half points of the prior low. It then lifted off the most oversold monthly stochastics reading since 2011, entering a recovery wave that has now run into a buzzsaw of selling pressure.

The four-month bounce still has not reached a significant Fibonacci retracement level, which will require continued upside into the mid-teens. Meanwhile, the monthly stochastics oscillator has just reached the overbought level, predicting a few more months of relative strength before sellers take control once again. This reading should offer bulls a minor tailwind, telling us to look for bottom fishers to support the stock once the first bout of selling pressure runs its course. (For more, see: SunPower to Construct 10MW Solar Plant in Covington.)

First Solar, Inc. (FSLR) Weekly Chart (2013 – 2017)


First Solar topped out at the same time as its peers in 2013 and 2014, building resistance in the low $70s while carving support in the low $40s. The rectangular pattern broke to the downside in August 2016, dropping the stock in a climactic sell-off that found support in April 2017 in the mid-$20s. It rallied back above the broken November 2016 low a few weeks later, setting off a 2B buying signal that denotes the failure of bears to defend a new resistance level.

The rally reached the 2016 breakdown level near $40 in May, generating a few weeks of testing, followed by a breakout that establishes new support at that price level. The uptick has now reached heavy resistance at the 200-week EMA descending from the upper $40s, with this barrier marking a perfect spot for a reversal that tests new support in coming weeks. In turn, that level should offer a low-risk buying opportunity. (See also: First Solar Reports Earnings in Q2, Raises '17 Outlook.)

The Bottom Line

Solar stocks are under pressure following a third-quarter revenue warning from major player SunPower, while sector leader First Solar has just reached steep resistance at the 200-week EMA. Taken together, the group could be headed into a pullback and consolidation lasting at least one to two months. (For additional reading, check out: The Current State of the Solar Energy Industry.)

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

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