Trader’s Narrative

According to Peter Brimlow from Marketwatch, the last bullish newsletter has abandoned China. The newsletter, Cabot China & Emerging Markets Report, has been the biggest bull riding the bull market in the far east to a stunning 90%+ gain in the past 12 months.

Editor Paul Goodwin recently wrote:

We’re a little self-conscious about calling ourselves BRIC (Brazil, Russia India, China) investors when all of our current recommendations are based in China…A buying panic! That’s exactly what’s been unfolding. [But] The bears have taken control! After a tremendously profitable run from the August lows, the Halter USX China Index (HXC) finally gave way to selling pressures, decisively breaking down through its 50-day moving average last week. This turns our China-Timer negative …

He recommends only one China stock right now: Suntech Power Holdings (STP). Which just happens to be one of the handful of solar power stocks that I highlighted a few months back. Since I mentioned it, STP doubled (from $35 to $70).

Due to recent advances in technology, this year and the last has witnessed the emergence of solar power from obscurity. There is a lot of activity in the sector and the technological complexity can be quite intimidating. So it is especially satisfying to know that as a chart reader one doesn’t need to be an engineer to profit in this sector.

I’ve been concentrating on the recent price action and find that it reminds me of something I read in Stan Weinstein’s Secrets of Profiting in Bull and Bear Markets. Weinstein provides a very methodical way of not only understanding the market but also of successively narrowing down one’s focus and drilling down from market, to a sector and then to a specific stock. Weinstein teaches that when we overlay the timing of the wider market on top of sector timing and then use stage analysis to select individual stocks, we exponentially increase the chance of finding explosive returns:

Back in the good old days of 1978, I noticed unusual strength appearing in the individual casino stock charts while the hotel-motel and leisure time groups also showed fabulous technical strength. In addition, their respective relative-strength lines were all extremely bullish. Furthermore there wasn’t a casino stock that had a bearish chart pattern. With all the buyables to choose from, I felt like a kid in a candy store hardly knowning which to choose. It’s unusual to see such incredible broad strength or weakness touch every stock in a sector, but when it does, don’t overlook the obvious message that the market is giving you.

As far as I know, there is no “solar power” sector index. Only an ETF, the Powershares WilderHill Clean Energy Fund:

If you’re familiar with Stan Weinstein’s ’stage analysis’ you will easily notice that it is setting up to exit from Stage 1 and enter Stage 2. Pay attention to its basing action, its 150 day moving average, its higher lows and higher highs but also its relative strength to the S&P 500 index. Interestingly enough, when PBW came out you would have benefited by not buying what Wall Street sells From its IPO level of ~$16 it immediately fell to $13. But now it looks interesting.

Here is a short list of solar stocks that piqued my interest as I was browsing the sector. They are not all pure plays, nor are they all the solar stocks out there. And yes, there are weak and atrocious looking solar stocks as well. We definitely do not have a repeat of 1978 with the gaming stocks as Weinstein outlines in his book (above). These just happen to be the stronger ones at the moment:

Ascent Solar (ASTI)
Amtech Systems (ASYS)
Evergreen Solar (ESLR)
First Solar (FSLR)
Hoku Scientific (HOKU)
MEMC Electronic (WFR)
Solarfun Power (SOLF)
Suntech Power (STP)
Sunpower (SPWR)
Trina (TSL)
WorldWater & Power (WWAT)

You know the routine… stage analysis, relative strength, enter on a pullback, etc. I especially like the ‘young’ stocks which have just recently come public: ASTI, FSLR and TSL. Their constituents are for the most part extremely happy since almost everyone who bought is in the green.

As the name suggest, Ascent Solar is in the burgeoning solar power sector and today it lighted up just about any sort of filter set for gaps or unusual volume or high trade count. By luck, ASTI was featured as one of the movers and shakers in the daily email I get from QCharts (at around 11 am). The news which propelled it to almost double from its close yesterday was a strategic aquisition of a good chunk of their shares by Norsk Hydro.

Things were ho-hum until the sixth candle which took price back up to the opening range high. The next two candlesticks were consecutively narrower in range, while remaining just below the opening range high (green circle). As price contracted, so did volume (green box).

Finally price broke up above the inside candle’s high (and the opening range high). It continued in an almost uninterrupted rise to reach almost $9 and close just under its high of the day. The combination of narrow range candles and a strong, enduring trend produced around an +8R. All in all, a textbook setup and trade.