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A Trade Too Good To Ignore

solar

If you will forgive me, I would like to brag a little. On April 27th of this year I wrote that after a long period of bullishness on First Solar (FSLR) during which the stock gained well over 150%, I recommended not just taking a profit, but also selling FSLR short. On that day, First Solar hit a multi-year high of $81.72 and began a precipitous drop. After the market close yesterday, the company reported earnings that showed a swing to a loss in Q2, and, understandably enough, it dropped again, leaving it over 40% lower than when I made that call. From a long-term perspective, however, the drop now looks overdone, and covering those shorts and going long now looks like the best trade.

As usual with swing trades like this, the reversal is prompted by both technical and fundamental factors. Let’s look at the technical first.

(Click to enlarge)

Regular readers will know that when it comes to technical analysis, I favor a simple approach based on support and resistance levels and look at exit points rather than entry points. Those preferences are based on simple truths. First, traders tend to respond to the obvious, so the more obscure the analysis, the less likely it is to be accurate. An obvious support level such as the 52-week low of FSLR at just below $45 marked above will attract buyers and make rapid further declines much less likely. The second truth is that long-term success in trading is at least as much about limiting potential losses as taking profits. The proximity of a level such as that above allows for a logical stop-loss that would limit potential loses to around 10%, a manageable number given the profit booked so far on the way up and then down.

However, regular readers will also be aware that I frequently caution that no matter how compelling the technical case for a stock, fundamentals will always override the chart. In the case of FSLR right now, the fundamentals look terrible for all the reasons I outlined in April, including a fossil fuel friendly White House and Congress, and the continuing trade war with China. What investors should bear in mind though, is that the success of that trade was based not on prevailing conditions at the time, but on a logical assessment of what was to come. It is, as the old saying goes, always darkest before the dawn, and there are reasons to believe that another dawn for FSLR is coming.

The biggest cause of FSLR’s collapse has been the ongoing trade war…




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