Fitz Bits: High Noon for Solar Stocks

Today we'll look at some reader requests:

• First Solar (FSLR - commentary - Cramer's Take)
• Canadian Solar (CSIQ - commentary - Cramer's Take)
• Solarfun Power Holdings (SOLF - commentary - Cramer's Take)
• Nucor (NUE - commentary - Cramer's Take)
• Eaton (ETN - commentary - Cramer's Take)

Each day, I'm featuring several reader requests for the current technical take on a stock. I can't assure you that I'll get to yours, but I will certainly make every attempt to do so, as long as the stock meets the following criteria.

1. The average daily trading volume needs to exceed 250,000 shares. If a stock trades too thinly, chart analysis doesn't help much, because there just are not that many traders involved. One big buy or sell order can move the stock in ways that chart analysis just cannot predict. So let's stay above 250,000 daily shares.

2. The stock really needs to be trading above $5. Sub-$5 stocks don't get the same treatment by institutions and portfolio managers. Also, many traders set their trading screens to ignore stocks below $5 just to cut down on their trading candidates. While I'm sure your favorite penny stock is the next undiscovered gem, I'm not in the business of breaking news stories ... so once your gem is discovered, let me know, and I'll take a look at the chart.

3. Make sure you check my recent "3 Stocks" videos. I don't want to be too redundant, so if I've recently covered a stock in video format, I won't repeat it here.

Hopefully, you've noticed that I alternate between daily and weekly bars in the charts. It's important to understand the underlying rationale for choosing one time frame over another. I differentiate between these time frames in pretty simple terms.

The longer time frame -- the weekly bar chart -- is my "decision" time frame. I want to remain in phase with the trend, and I use the weekly bar chart to identify the trend. So I'll feature a weekly chart when I want to emphasize a certain aspect of the prevailing trend -- not a specific buy or sell point. This weekly chart is the time frame in which I make my decision: Do I want to buy or sell the stock?

The daily chart is my "action" time frame. Once a decision is made on the basis of the weekly time frame, then we zoom in on the daily chart to choose that level at which action is taken. The daily time frame is my preferred frame of reference for actually implementing the decisions I've made on the weekly chart.

In your own analysis, make sure you are using different time frames for different things; otherwise your actions will largely be a function of your emotions.

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Each rally on First Solar had been capped by the 50-day moving average until recently. Notice how the stock had been trending sideways during the latter half of December, only to break out last Friday? Well, yesterday saw even more bulls show up to the party. But one of my trading rules is that I avoid buying a stock that has rallied significantly for two consecutive days, and that's right where FSLR is now. I'd wait for this rally to run its course and buy on any pullback to test the 50-day moving average.

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I've highlighted the early November break of support in this daily chart of Canadian Solar. Notice how the decline continued for another couple of weeks until the stock bottomed on just average volume. But since that low, CSIQ has rallied more than 80%, thereby increasing the chances that we'll see some profit-taking. If you're looking to get long Canadian Solar, I'd suggest waiting for either a pullback to the current support line or for a breakout above the 50-day moving average. And in either event, I'd keep a tight stop.

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Solarfun Power Holdings had been consolidating in a very, very tight range until last week when it bounced off $4.50 and ran more than 30%. Often, a high-volume breakout from a very tight trading range runs farther than you might think. And with the stock now on the move, I'd stay long. But I'd also protect that position with a trailing stop.

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During October and November, the Nucor bulls were unable to soak up all the supply at $40. But in early December, buyers finally had to pay up for the stock. Since then, we've seen a pullback to $40 that was met with more buying interest. So where is NUE now? It's right at the top of the $40-$48 trading range. I'd be patient and wait for a pullback before buying.

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During December, Eaton (ETN - commentary - Cramer's Take) ETN traded in an increasingly tight range and set up an explosive volatility squeeze. You can see how the stock has blown right through the 50-day moving average and continues to run along the upper Bollinger Band. I'd stay long ETN but keep a trailing stop just below the 50-day moving average.

Be careful out there.

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Know What You Own: Other stocks in the solar sector include Suntech Power Holdings (STP - commentary - Cramer's Take) and Sunpower (SPWR - commentary - Cramer's Take).

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At the time of publication, Fitzpatrick had no positions in stocks mentioned, though positions may change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback; click here to send him an email.