Shares of solar module manufacturer First Solar, Inc. (NASDAQ:FSLR) rallied Tuesday, and as a result broke out of a bullish technical formation that promises plenty higher prices to come.
When First Solar reported its latest quarterly results a month ago on Feb. 24, it beat analyst estimates handsomely but came in shy of expectations on the top line. Investors nonetheless welcomed the news and bid the stock higher — despite a very choppy going in 2014, solar stocks as a group still are a focus of momentum traders and trend followers.
For some bigger-picture context, keep in mind that many solar stocks — which are part of the energy sector — were sold with both hands late last summer and into early this year amid the slide in oil prices. The fear here was that cheap oil wouldn’t provide much incentive for people to seek out solar contracts.
Some would argue that solar stocks like FSLR were punished unfairly, and that on a relative basis, these stocks could be a bargain.
A fair amount of dispersion remains among solar stocks, but through a technical lens, First Solar stock has behaved in a near-textbook fashion since early February.
First Solar (FSLR) Stock Charts
Looking at the multiyear weekly chart of FSLR, we see that after a steep drop in 2011 and the first half of 2012, First Solar shares began to stabilize and work their way higher. The sharp 2013 and 2014 rally then ended by August 2014 as the aforementioned crash in oil prices weighed on FSLR stock.
However, the selloff came to a halt this January as FSLR retraced almost exactly 61.8% of the entire 2012-14 rally, which is an important support area from a Fibonacci analysis perspective. In other words, while the selling in the autumn of 2014 was fierce, FSLR stock for the most part kept its positive posture … at least from a multiyear perspective.
On the daily chart, we see that FSLR had built a good base in December and January, which it then broke out of on Feb. 3, which kicked off the entire upside swing since. After the February earnings report, First Solar stock really jumped higher on a big surge in volume; this also pushed the stock back above its 200-day simple moving average (red line).
A multiweek consolidation phase then settled in, all of which took place above the 200-day, then Tuesday’s 3.19% rally broke FSLR out of what had shaped into a bull flag formation.
The trade that has set up is a “bullish continuation play” whereby FSLR stock looks to rally higher after the recent consolidation phase and on the back of February’s post-earnings move.
A basic momentum strategy would now dictate that traders buy FSLR stock on a push above Tuesday’s intraday highs near $63.10 for at least a multiweek move into the high $60s to low $70s.
As always, any sharp bearish reversal of Tuesday’s rally would quickly negate the current bullish setup.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.