The First In, First Out Solar Thesis

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After starting out 2011 in style, the solars fizzled out in mid-February, even as tensions in the Middle East saw crude soar. While many other areas of the market have just recently gotten hit, solars have clearly been in multi-week downtrends. The idea now is to gauge whether they will now be the first ones to emerge from a broad market correction.

While many traders are declaring broad market bottoms after a variety of bullish engulfing candles printed on Friday, I would caution that bullish reversal candles are most valid only after established prior downtrends. As an example, “hammer” candlesticks are printed all the time on charts, and too often traders make poor decisions by simply declaring that any old hammer is bullish and aggressively buying a stock based on that thesis. In reality, hammers are really only valid bullish reversal signals after a steep prior downtrend, and with upside confirmation (not to mention, they are usually bearish omens after an established uptrend, called “hanging man” candlesticks instead).

Hence, I would be much more apt to look for a tradeable bottom in solars, than I would in the broad market and other areas. At the top of this post, compare the daily charts of TAN, the ETF for solars, versus the daily chart for the QQQQ ETF. Can you see the difference? Solars have clearly been in a steep downtrend, while the Q’s have come in off the highs to be sure, but are hardly at the tail end of a multi-week decline.

Below, you will find several annotated daily charts of some solar names that I will be watching closely early next week.

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