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CHART ANALYSIS


For First Solar, A Lasting Decline?

04/10/12 08:49:36 AM
by Donald W. Pendergast, Jr.

Shares of First Solar are down by by nearly 94% from their all-time high. Is this stock due for a meaningful rebound?

Security:   N/A
Position:   N/A

For those traders who remember the dotcom era in the mid- to late 1990s, the terms "mania stock" and "speculative bubble" are no doubt already familiar terms. Relatively few of those Clinton-era high-fliers in the stock market survived, much less thrived, after the devastating blowoff in the NASDAQ that started in the spring of 2000.

Newer traders should also recall when the homebuilder stocks were going vertical in the mid-2000s, uranium mining stocks in 2007 or so and, last but not least, solar/alternative energy stocks in the late 2000s. The stock we're about to do an autopsy on hails from the alternative energy industry group, one that peaked (in stock market terms) more than two years ago and has been in a bear funk ever since.

First Solar, Inc. (FSLR), traded as high as $317 in May 2008 and has faded steadily since those days of such hope and optimism amid the Presidential election year of 2008. The last 13 months have been especially brutal on the stock, with FSLR plunging from $175.45 in February 2011 to its current valuation of only $20.93 (as of April 6, 2012). Clearly, this is more than just a normal pullback or a "buy the dips" situation, so what exactly is going on with this stock, anyway?

FIGURE 1: FSLR, DAILY. Even value investors need to be aware of certain technicals before blindly running to build a position in a beaten-down stock. In this case, waiting for a bullish price/money flow divergence would be a very wise strategy, as would waiting for at least one of the near-term resistance lines to be exceeded.
Graphic provided by: MetaStock.
Graphic provided by: CS Scientific expert from MetaStock 11.
 
The daily chart of FSLR (Figure 1) really says it all; this stock is enmeshed in a steadily declining trend, one that features precious few rebound rallies for previously burned investors to recoup losses with. Medium-term money flow (based on the 34-period Chaikin money flow [CMF][34]) is horrible (and still dropping), with no sign yet of a meaningful price/money flow divergence on the chart. There are also few if any strong support levels below the $20 area, and with the stock's long-term trend so bearish, it's doubtful that anyone other than the most hard-core value investor would even consider the thought of starting to build a position in FSLR now.

The stock has neutral earnings growth potential so the situation isn't without hope, but a few things need to happen before FSLR might be worthy of building a new position in:

1.The broad markets, which have likely peaked and are about to correct by 5% to 10%, need to form a major multicycle low, probably by late summer 2012.
2. FSLR also needs to make a similar multicycle low in the same general time window (summer 2012).
3. FSLR needs to close above the March 2012 high of $29.63 and then go on to close the open gap (the gap of late February 2012) that exists between 34.13 and 34.50.

Relatively high crude oil prices of late have also done nothing to help FSLR make a turnaround; in fact, it's interesting to note that FSLR made its all-time high of $317, a full six weeks before crude oil made its own record-high close in early July 2008. While both fell hard after that major blowoff in the commodities market, crude oil eventually recovered more than half its losses while FSLR just kept heading south. See Figure 2.

As far as playing FSLR goes, the most prudent course of action might be to just stand aside until the broad markets bottom out sometime this summer before even considering taking a nibble on FSLR again. Aggressive, skilled traders can be buying puts now in anticipation of more downside into a major summer low in the broad market but don't go overboard, because it's always possible for FSLR to stage a short-covering rally every so often, one that could be very expensive if you manage to get caught on the wrong side of it.

FIGURE 2: LARGE-CAP ROC. Ten large-cap stocks that are far underperforming the .SPX over the past calendar quarter.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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