First Solar, Inc.: The TRAP that Converted FSLR Stock to Bullish
FSLR Stock: Bear Trap
It looks like many of the companies involved with alternative energy, solar power specifically, have gained some momentum. It is not a coincidence that this sector is seeing strength after crude oil has regained some footing and is once again trading north of $50.00 per barrel.
The alternative energy sector is positively correlated with oil, and First Solar, Inc. (NASDAQ:FSLR) stock has gained as result. The tailwind created from the appreciation in crude oil has had a prolific effect on FSLR stock. It has served to reverse a bearish breakdown, and the implications are very bullish.
I have been using price charts as the basis of my investment analysis. This process has allowed me to use prices to define my entry and exit points and, most importantly, my risk. This has kept my strategies disciplined and objective. My analysis is based on technical analysis, and this style has served me well, but it is not without its faults.
Technical analysis is not perfect, and the signals generated from stock prices do fail. Failed signals are indicators, and very powerful ones at that. Many great moves in price have occurred off of failed signals. This is why it is always wise to pay heed to such instances. If I am ever caught on the wrong side of a signal, I find it wise to quickly unwind and reverse any trades that were based on this failed signal.
The following First Solar stock chart illustrates a false breakdown.
Chart courtesy of StockCharts.com
In August 2016, FSLR stock fell below $40.00. This price level was where bulls would step in and halt any further selling. This level of support stood for two years before it was finally broken, and the implications were initially bearish for First Solar stock.
I had initially assumed that when the First Solar stock price returned to $40.00 from beneath, it was a backtest, as prices have a tendency to revisit a level of support or resistance one last time before the prevailing trend reasserts itself. This bearish bias is now unfounded, because FSLR stock is trading above this level, signaling that the bearish breakdown was indeed false.
False breakdowns are referred to as “bear traps” because a bearish signal causes traders to position themselves as assuming a bearish outcome and, now that the signal has proven to be false, they have to quickly reverse their positions or suffer the consequences.
Failed signals are powerful indicators for this exact reason. All of the bears have to quickly reverse their positions, and the longer they take to do so, the more pain is inflicted. This phenomenon, compounded with buying from the bulls, serves to fuel a rally and, in many cases, the rally is quite explosive.
The panel in the bottom labeled “MACD” is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals. The weekly moving average convergence divergence (MACD) bullish cross serves to further reinforce the bullish case that a rally is now developing and that a bearish bias on FSLR stock is unfounded.
The following First Solar stock chart illustrates the long-term trend.
Chart courtesy of StockCharts.com
The above First Solar stock chart illustrates that, although a rally may now be developing, the overall trend on a long-term basis is still bearish. This trend is illustrated by using a simple trend line that is created by connecting the peaks on the price chart. This trend line represents a downtrend, and it is easily identified as the price moves from the upper left to the lower right. This is a clear example of bearish price action. FSLR stock will continue to be viewed in a bearish light for as long as it trades below this trend line.
The Bottom Line on First Solar Stock
My short-term bias on First Solar stock is now bullish, as the false breakdown will create a bullish headwind and push shares higher in the meantime. The longer-term picture is still bearish on FSLR stock, and I would only use the current short-term signals as a basis for a swing trade.