First Solar (FSLR) Rallies to 2-Year High

, Inc. stock surged a two-year high last week after the company beat second quarter 2020 estimates by a wide margin, posting a profit of $0.35 per share on a 9.8% revenue increase $642.41 million. The sale of a key project underpinned quarterly revenue, with the solar manufacturer and installer realigning business priorities after years of weak performance. It announced a second divestiture at the time of the release, highlighting this ongoing strategy.

Key Takeaways

  • First Solar stock could enter a multi-year uptrend, benefiting from the transition into renewable energy sources.
  • The rally has reached long-term resistance, raising the odds for a pullback.
  • Price action could ease into a holding pattern ahead of the November election.

The company is well positioned to thrive and prosper throughout this decade, with the transition from fossil fuel to alternative energy sources picking up steam around the world. Closer to home, First Solar has emerged as a key player in a California law mandating solar on new installations, adding to developing tailwinds. A Democratic presidency could super-charge this trend, lifting the stock to price levels not seen since 2011.

Wall Street consensus hasn't picked up on the positive trends, at least yet, with a "Hold" rating based upon four "Buy," four "Hold," and three "Sell" recommendations. Price targets currently range from a low of $38 to a Street-high $79, while the stock is set to open Wednesday's session about $8 above the median $62 target. This placement suggests that upgrades will be needed to add to gains, especially with price action now reaching multi-year resistance in the $70s.

A renewable resource is one that can be used repeatedly and does not run out because it is naturally replaced. A renewable resource, essentially, has an endless supply. Examples include solar energy, wind energy, and geothermal pressure.

First Solar Long-Term Chart (2006 – 2020)

The company came public at $24.50 in November 2006 and entered a rip-roaring uptrend that posted an all-time high at $317.00 in May 2008. It fell to a 15-month low in the double digits after the economic collapse and bounced into 2009, carving a lower high in a double top pattern that broke to the downside in the third quarter of 2011. The subsequent decline posted steep losses into June 2012's all-time low at $11.43, ahead of a recovery wave that stalled near $75 in 2014.

Breakout attempts failed in 2014 and 2016, yielding a selloff that carved a higher long-term low near $25 in 2017. The stock rallied back to resistance a third time in the second quarter of 2018 and failed to break out once again, generating a two-legged decline that posted another higher low in the upper $20s in March 2020. The stock has now surged into resistance for the fourth time in the past six years, raising hopes that it will finally break out.

First Solar Short-Term Chart (2018 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator topped out in 2015 and tested resistance in 2018. Sellers prevailed, yielding a distribution wave, followed by a buying spike that posted a lower 2019 high. Unfortunately, the accumulation wave that started in March 2020 shows inadequate buying power, failing to reach either peak, although the stock just traded within four points of the prior high. In turn, this generates a bearish divergence that lowers the odds for a breakout in coming weeks.

Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction.

As a result, price action is vulnerable to a downturn that could reach the 50- or 200-day exponential moving averages (EMAs) in the $50s. That would mark about a 50% retracement of the rally that started in March and give the emerging trend more time to attract committed buying interest. It's also possible that price will settle in the upper third of the range and ease into a holding pattern until November, waiting to see if a presidential candidate who supports aggressive climate change policies gets elected.

The Bottom Line

First Solar stock may complete a multi-year basing pattern and break out in a new uptrend, underpinned by more aggressive climate change policies.  

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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