Fitz Bits: Prospects Dim for Solar Stocks

Today we'll look at some reader requests:

• First Solar (FSLR - commentary - Cramer's Take)
• LDK Solar (LDK - commentary - Cramer's Take)
• Energy Conversion Devices (ENER - commentary - Cramer's Take)
• Deere (DE - commentary - Cramer's Take)
• Caterpillar (CAT - 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.

One reader asked for my take on three solar stocks, which I believe remain in darkness.

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First Solar continues to trend lower, with each rally ending at the 50-day moving average. That's your first sign that it's not right to buy. I'd only be a buyer when the bulls show they've got enough commitment to start buying the stock above the 50-day moving average. Until then, stand aside.

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I've outlined the current downtrending channel in this daily chart of LDK Solar. Notice that this stock is so weak that the peaks aren't even challenging the 50-day moving average. If the stock moves up above $15 before the average hits $10, then we've got a higher high that follows the higher December low -- a bullish development. But absent that kind of move, I'd just steer clear.

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Energy Conversion Devices looks a lot like LDK, so the analysis is pretty much the same. If you bought now at $20, you'd be risking a major pullback within the channel. Simply put, it's not good trading to expect a stock to break out just because you happen to own it. Instead, wait for evidence that the stock is firming up and is poised to break out of the channel. There is no sign of buying right now.

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Deere looks like it has put in a bottom at around $30. Over the past week or so, the stock has been consolidating at the 50-day moving average, which sets up a bullish pattern. A high-volume breakout above resistance would be a bullish buy signal. Alternatively, a pullback to test the December low would set up a lower-risk opportunity because you could place a protective stop just below an established support level. If support breaks down, you wouldn't want to be long anyway.

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Caterpillar is another heavy equipment company that is setting up for a trend reversal. With the stock currently churning between $40 and $45, I'd keep a stop just below $40. Also, before I'd buy a breakout, I'd want to make sure Deere was going the same way. When two stocks in the same industry are moving in the same direction, there is a greater likelihood that the move is sustainable.

Be careful out there.

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Know What You Own: Fitzpatrick mentions solar-power companies. Other companies in this industry include Suntech Power (STP - commentary - Cramer's Take) and Kyocera (KYO - commentary - Cramer's Take).

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At the time of publication, Fitzpatrick was had no positions in the 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.