First Solar, Inc. (FSLR) stock is testing nine-year resistance on Thursday, at the cusp of a major breakout that could generate superior returns in coming years. The stock reversed at this barrier in late August and fell 20 points after the company announced an 8.6 million secondary share offering, yielding a bounce just above the 200-day exponential moving average (EMA) in the low $60s. It turned higher at the end of September and has now returned to this critical level.
- First Solar stock has been stuck in a basing pattern since 2014.
- The company should benefit from aggressive climate change policy.
- The stock has rallied to resistance for the fourth time and could break out.
- An uptrend may generate superior returns in coming years.
The solar cell manufacturer and power plant designer should thrive and prosper in this decade, with worldwide political sentiment transitioning out of fossil fuel and into alternative energy sources. The Arizona-based company will also benefit from a 2020 California law mandating solar panels on all new single- and multi-family constructions. A Democratic administration would likely augment these trends, lifting the stock to price levels not seen since 2011.
Wall Street consensus has slowly improved in 2020, with a “Moderate Buy” rating on First Solar shares based upon six “Buy,” four “Hold,” and two “Sell” recommendations. Price targets currently range from a low of $38 to a Street-high $95, while the stock is set to open Thursday’s session about $9 above the median $72 target. This placement may support an initial breakout, but further upgrades will be needed to establish a long-term uptrend.
There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.
First Solar Long-Term Chart (2006 – 2020)
The company came public at $24.50 in November 2006 and entered a momentum-fueled advance that hit an all-time high at $317.00 in May 2008. It sold off into the double digits during the economic collapse and lifted above $200 in 2009, posting a lower high in a double top pattern that broke down in September 2011. The stock suffered major losses into June 2012’s all-time low at $11.43, ahead of a bounce that ended near $75 in 2014.
Breakout attempts in 2014, 2016, and 2018 failed, reinforcing resistance between $75 and $80, while downdrafts established deep support in the upper $20s. The stock rallied back to this formidable barrier for the fourth time in August 2020, yielding a steep reversal followed by a recovery wave that reached the contested level once again this week. This resilience sharply raises the odds for an eventual breakout, with a first target in the triple digits.
First Solar Short-Term Chart (2018 – 2020)
Price action between 2018 and 2020 has carved the outline of a potential inverse head and shoulders pattern, but the deep first quarter low stands out like a sore thumb, perhaps indicating that the breakout needs more time to mature. The on-balance volume (OBV) accumulation-distribution indicator is telling a similar tale, dropping back to the first quarter low in September, while the subsequent uptick has failed to end the string of lower highs in place since 2017.
The vertical buying wave in the past two weeks adds a third measure of caution, raising the odds for consolidative price action that could stretch into the company’s Oct. 29 earnings release. The most bullish scenario between now and then will be a steady OBV uptick, improving the heavy look of this volume indicator while showing that sidelined investors have noticed the bullish pattern and are jumping on board in a positive feedback loop.
Positive feedback, or a positive feedback loop, is a self-perpetuating pattern of investment behavior where the end result reinforces the initial act. This can greatly affect productivity.
The Bottom Line
Fist Solar stock is engaged in the fourth test at nine-year resistance since 2014 and could enter a powerful uptrend in coming months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.