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Solar Stocks Setting Up to Break Out - 44914 views
WINDERMERE, Fla. (Stockpickr) -- Traders continue to sell stocks today and ask questions later. The catalyst is the Japanese nuclear crisis, which is weighing on investor sentiment. There are major concerns that a reactor containment vessel owned by Tokyo Electric Power may have been breached at the damaged Fukushima Daiichi power plant, raising the possibility of a catastrophic radioactive leak.
Fears are quickly escalating that the situation is spiraling out of control despite the efforts of the Japanese government, military and power authorities. Japan has now ordered most emergency workers to withdraw from the damaged nuclear power plant due to dangerous radiation levels. Japanese authorities even tried to use a helicopter to drop water on the most damaged areas of the reactor, but so far that has failed to work due to high radiation levels.
The major concern is that unless Fukushima can be brought under control, radiation will soon threaten Tokyo and other major cities. This is serious and could threaten the lives of hundreds of thousands of Japanese citizens.
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These fears have set off a domino reaction among world stock markets. The U.S. market has sustained some significant technical damage that market players shouldn’t ignore. The Dow Jones Industrial Average has now sliced through its 50-day moving average of 12,013.73 and has dropped below some major near-term support at 11,803.04. The S&P 500 has also sliced through its 50-day moving average of 1,302.99 and has also dropped below major near-term support at 1,302.58 and at around 1,275.
Related: Cramer's Stocks for a Japan Rebuild
Despite the weakness in U.S. stocks, there is one sector that has escaped most of the selling and has started to show signs of strength: the solar energy complex. Traders are starting to warm up to this space because these companies make solar panels and other related equipment, which is much safer than nuclear. By no means am I saying that solar can completely replace nuclear power, but it's clear that traders are starting to place their bets that these stocks are going to win big off the Japan nuclear crisis.
The thesis here is that Japan is going to have to adopt solar power and quickly to make up for lost power generation from nuclear. Other counties will also turn toward solar as they delay any new nuclear plant construction. Plus Japan makes up around 10% of the world’s total solar production. One more reason that solar stocks look so attractive right now is that many trade at cheap valuations.
With this in mind, let’s take a look at a number of solar energy stocks that could be poised to trend significantly higher.
One solar stock that is starting to look bullish from a technical standpoint is ReneSola (SOL), a China-based manufacturer of solar wafers and producer of solar power products. This company has a market cap of $807.74 million and an enterprise value of $983.15 million. The stock trades at an extremely cheap valuation, with a trailing price-to-earnings of 4.80 and a forward price-to-earnings of just 4.46. So far in 2011 this stock is up around 6%.
If you take a look at the chart for ReneSola, you’ll see that the stock has started break out above a bearish downtrend line on some huge upside volume. Volume on Tuesday registered about 8.4 million shares, which is almost twice the three-month average trading activity of 4.5 million shares. When a stock starts to move above a downtrend line that has acted as major resistance in the past, it can often signal technically that the stock is starting to enter a new bullish uptrend.
What market players should watch for now is for shares of ReneSola to consolidate some of their recent gains from $8 to above $9 a share. It would be productive technically for any consolidation to come on light volume, let’s say at around 2 million to 4 million shares. If that does occur, I would look to buy this stock on any modest pullback and then would add to the long position once the stock takes out the next major resistance area at the 50-day moving average of $10.50 a share.
A move above the 50-day moving average on heavy volume should set up ReneSola to start an uptrending chart pattern that could put the stock on a collision course with $13 to $14 a share. That’s a ton of upside from current levels, so traders should definitely keep an eye on this name going forward.
Keep in mind that this company recently reported core revenue of $386.4 million in the fourth quarter, which was an increase of 7.7% from $358.7 million in the third quarter of last year. So the fundamentals are also intact here with ReneSola.
ReneSola was one of George Soros' solar stock picks from the most-recent period. It showed up on a recent list of 10 energy stocks to watch, as well as a list of five solar stocks topping performance lists.
Another solar stock that’s setting up technically for higher prices is U.S.-based SunPower (SPWRA), a vertically integrated solar products and services company that designs, manufactures and markets high-performance solar electric power technologies. This company has a market cap of $1.43 billion and an enterprise value of $1.51 billion. This stock also trades at a very cheap valuation, with a trailing price-to-earnings of 8.86 and a forward price-to-earnings of 6.55. SunPower is off to a hot start in 2011, with shares already up around 21%.
If you take a look at the chart for SunPower, you’ll see that this solar name also just broke above a major downtrend line that started back at the end of February. Shares had dropped from around $19.88 to a recent low of $13.91 a share, but now the stock is starting to move above that major downtrend line resistance area and has also started to move back above its 50-day moving average of $15.34. This move above near-term resistance is coming on absolutely huge volume that registered 11.7 million shares on Tuesday vs. the three-month average trading activity of 3.3 million shares.
Many times when you see a huge-volume move above a downtrend line, it sets the stock up to change its overall trend. What’s even more bullish about the chart for SunPower is that the stock has been making higher lows since December. Every time the stock pulled back in the past few months, traders have jumped in to buy it at higher prices. This shows that large institutional investors are eager to enter this name on any weakness.
The bottom line is that I would look to add this stock on any weakness as long as it doesn’t trade too much below $14 a share. That price is important because it will keep the uptrending pattern of higher lows intact. It would also be bullish if the stock finds support at the base of the downtrend line and doesn’t trade noticeably below it.
It’s also worth noting that this stock is heavily shorted by the bears. Around 28% of the tradable float is currently sold short, so a massive short squeeze could easily be inspired of SunPower continues to trend higher. This stock could easily revisit its 52-week of $22.19 a share in short order.
One more solar play that looks technically ready for higher prices is JA Solar Holdings (JASO), a manufacturer of high-performance solar cells based in the People's Republic of China. This company has a market cap of $1.13 billion and an enterprise value of $1.24 billion. This is another extremely cheap solar stock, with shares currently trading at a trailing price-to-earnings of 4.41 and a forward price-to-earnings of 4.88. JA Solar is off to a flat start in 2011, with shares down around 1% so far on the year.
If you take a look at the chart for JA Solar, you’ll see that this solar player has also started to break out above a downtrend line on huge volume. On Tuesday, the stock started to make that move above the near-term resistance area on volume that registered at 23 million shares vs. the three-month average volume of 10 million shares. This move took the stock back above its 200-day moving average of $6.99, but it still trades below its 50-day moving average of $7.33.
I don’t love that this stock recently broke below some major support areas at around $6.60 to $6.70 a share. However, now that it’s moving above that major downtrend line resistance area it could be setting up to change its overall trend. I would look to buy this stock on any weakness that keeps it from dropping back below the downtrend line. I would add to the long position once it moves above the 50-day on big volume. The play here would be for a new uptrend to start and take the stock back towards $10.24 a share which is its 52-week high.
To see more uptrending solar stocks, check out the Uptrending Solar Stocks portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.