Solar stocks entered 2021 in the midst of a roaring bull market. Sunpower (NASDAQ:SPWR) might have had the best start of the bunch, with its share price more than doubling in January alone. To say the pace was unsustainable is an understatement. Sentiment has since cooled, and SPWR stock is now well off its highs.
Is the back of the bull broken? Or, is this merely a much-needed correction, a pause in an otherwise healthy long-term bull market? Today’s message will explore both queries. As always, the chart will tell the tale.
Rather than dive directly into the SPWR stock chart, let’s first examine the overall industry’s health via the Solar ETF (NYSEARCA:TAN).
Solar is Cooling, for Now
The fundamental catalysts driving the solar bull market are compelling. First, there’s the overarching theme of the economy reopening and life returning to normal this year. Asset prices are forward-looking, and, well, they like what they see. Second, the election saw Democrats take control of Washington and investors think their reign will favor solar power policies.
Time will tell if reality can live up to the hyped-up perception, but investors seem to be betting this has the potential to be a long-lasting secular story. Unfortunately, as we just saw with SPWR, when too many future gains get pulled forward, it puts the stock in a precarious position. One little disappointment can cause the hastily built Jenga tower to crumble. More on that in a minute.
Despite the recent correction, TAN remains in a long-term uptrend. Given the past year’s meteoric ascent, it’s going to take more than a month’s worth of liquidation to turn the tide. That’s the good news. The bad news is that TAN’s daily trend has reversed lower. Prices breached a horizontal support zone ($106) and the rising 50-day moving average. This is the first time we’ve visited the south side of the 50-day since the bull market began in earnest last April.
Volume during the selloff is also concerning. Distribution swelled, showing some serious selling pressure. It’s the type of liquidation that lingers, making it difficult for a swift recovery. Until TAN reclaims the high ground above the 50-day moving average, bull trades in solar stocks carry a higher risk of failure.
The Trend for SPWR Stock Is Down
I think the first takeaway from the recent price tumble is that stocks that rise five-fold in less than six months better deliver something stellar come earnings time, or a wicked rug-pull awaits. SPWR climbed too far too fast, and this month’s quarterly report simply wasn’t good enough to support such a rapid rise in valuation.
The destruction’s silver lining is that it brings lower prices and superior entries if you’re a believer in the long-term bullish story. Rather than piling in at random, however, I suggest a more strategic approach. SPWR stock is now in a daily downtrend with a lower pivot low and lower pivot high. This week’s snap-back was powerful, yes, but it hasn’t changed the trend’s trajectory yet.
The Smart Trade
Patience is likely warranted here. If prices can carve out a bottoming pattern or at least reverse the pattern of lower highs and lows, then bottom fishers will have a more compelling argument for casting a line. For now, the past two-day rally looks like a bear retracement and nothing more. Chasing new longs after the stock has rallied over 20% off its lows (in two days, no less!) is risky.
If you’re itching for an entry, wait for the stock to settle or dip back down over the next few sessions, then sell puts. I like something in the mid-$20s, like $25 or $26 for April expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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