Solar stocks have been in desperate need of a recharge, but don’t hold your breath. Their recent behavior amid the broader market turmoil is giving little hope that the much-needed jolt will arrive any time soon.
Wall Street’s favorite solar ETF — the Guggenheim Solar ETF (TAN) — is a stone’s throw away from what could be another epic breakdown. No doubt the looming support breach will usher in another round of pain and disappointment for some of the heavy hitters in the solar space sector, such as First Solar, Inc. (FSLR) and SolarCity Corp (SCTY).
The price chart of TAN boasts a trio of troubling signs.
- Relative weakness seized the stock in early 2014 and has yet to let up. With underperformance as its bedfellow any and all recovery attempts have been stymied in short order.
- The uninterrupted series of lower pivot highs in recent weeks show an increased aggression by sellers. A descending triangle has formed and its apex looms closely. There’s no question resolution of the pausing pattern is imminent and the odds suggest the next move is lower.
- The long-term view of TAN (not shown) shows little additional support below the current floor of $32. Price voids such as this often lead to swift moves lower before a new support level is found. TAN could fall some 10% before reaching its next support zone.
Though the TAN ETF offers option contracts they leave much to be desired in the liquidity department. The bid-ask spreads are atrocious and volume is virtually non-existent.
Would-be solar sector traders will be better served by focusing on the more popular names like FSLR stock and SCTY stock. The liquidity in both is far better than TAN and the charts look equally dismal. Watch for a breakdown of the $40 level in FSLR and the $47 level in SCTY.
A Pair of Solar Stock Option Bets
To exploit the coming breakdown consider these two option plays
Buy the FSLR Mar $40/$35 put spread for $2. The max loss is limited to the initial $2 debit and will be incurred if FSLR stock sits above $40 at March expiration. The max gain is limited to the distance between strikes minus the initial debit, or $3, and will be captured if FSLR can fall below $35 by expiration.
Buy the SCTY April $49/$44 put spread for $2.45. The max loss is limited to the initial $2.45 debit and will be incurred if SCTY stock sits above $49 at April expiration. The max gain is limited to the distance between strikes minus the initial debit, or $2.55, and will be captured if SCTY can fall below $44 by expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
