First Solar

(FSLR) - Get Report

charged out of the gate when it came public at $20 on Nov. 17, 2006. Shares closed over $24 in that first session and raced higher for over a year, finally pushing above $300 in April 2008. That big round number turned out to be resistance for the solar cell giant, with the stock then rolling over and dropping into a long decline.

Although the stock bottomed out in late 2008, it's had a tough time finding its mojo during the recovery and working its way out of the deep doldrums. Industry pricing pressures and reduced subsides from cah-strapped world governments have combined to keep a lid on the sector in general and this former juggernaut in particular.

But I see reasons to be hopeful while we wait for the company to report earnings on April 28. Two weeks ago, mid-cap rival

JA Solar

(JASO)

triggered a sector rally when it raised quarterly guidance due to greater-than-expected shipments. This ray of light might signal the end of bad times for the solar stocks and the start of a new bull-market advance.

But it pays to be skeptical until there's more evidence the sector is finally turning around and set to reward its long-suffering shareholders. After all, we've seen a series of false-dawn rallies in the last two years, and cash poorly applied to these beaten-down issues can't be used to play a market that's nearly as hot as 1999 or 2004.

While I'm focusing attention on First Solar today, keep in mind that solar stocks tend to move in tandem, with a handful of smaller operations capable of greater percentage gains during favorable market periods. For this reason, it's a good idea to create a watch list of these companies and to trade the hottest names when this sector leader is in rally mode.

Right now, these are the smaller components best positioned to benefit from a sector recovery:

  • Trina Solar (TSL)
  • JA Solar (JASO)
  • Solarfun (SOLF)

First Solar's 2006-to-2008 uptrend shows a classic Elliott five-wave rally structure. First, the stock carved out three rally waves, with two major pullbacks. Next, the second wave shows the greatest extension, while the second and fourth (corrective) waves never overlap. Finally, the third and final wave is the shortest of the three, with a buzz saw of selling pressure hitting the stock when it rallied above 2007 resistance at $283.

The uptrend ended in April 2008, with price chopping sideways for the next five months and then selling off with the broad market. That downswing broke support between $235 and $300 in September and gathered downside momentum, dropping price all the way to $85.28, where the stock finally bottomed out on Nov 21, 2008.

It spent the next four months pounding out a double-bottom pattern that printed a higher low in March 2009. The subsequent recovery was fast and furious, with the stock doubling in price by early May. That high at $207.51 turned out to be the post-crash peak, with price again rolling over and retesting the March low in February of this year.

First Solar bounced off that level just as the broad market took off in the latest leg of its powerful recovery. But so far at least, the current uptrend hasn't posted a single higher high on the weekly pattern. This is an absolute prerequisite when considering the quality of a stock's recovery following a long downtrend.

The upswing has now pushed into resistance at the 50-week moving average. This level has marked a major barrier at least three times (the red circles on the weekly chart above) in the last 10 months. Those multiple pauses give us an inflection point to watch when the company reports earnings next week. Specifically, a high-volume rally through $140 to $150 would improve the technical outlook and support an uptrend that might reach the 2009 swing high over $200.

The October 2009 gap stands out like a sore thumb on the daily chart, with the ugly selloff between $148 and $130 dominating this stock's price action in the last five months. Note how the December bounce stalled above $140, failing to fill the big gap. Then, just like clockwork, the most recent uptick was turned away at the same level last week.

These reversals echo the weekly chart's focus on the $140-to-$150 price zone. The good news is that, once mounted, the hole should provide excellent support on any pullback. But there's a real danger in jumping on board too early, hoping that best-case scenario unfolds in the next few weeks. Just put yourself into the shoes of hopeful buyers ahead of the October report that triggered the massive overnight decline.

The theme of caution into earnings continues when looking at On-Balance Volume (OBV). This accumulation-distribution indicator has carved out a series of lower highs that points to institutional distribution still under way. That won't change until volume pours into the buy side and OBV finally lifts above the red trend line.

Yes, that could happen in reaction to a strong first-quarter earnings report and a bullish outlook for the rest of 2010. But there's no logical reason to give First Solar the benefit of the doubt ahead of that report, because the company has been a chronic disappointment for shareholders in the last three years.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

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, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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