DELAFIELD, Wis. (Stockpickr) -- Anyone who has traded the markets long enough knows that momentum investing cuts both ways.
Momentum is a trader's best friend when the market is soaring to the upside. Traders know that breakouts above previous resistance levels will be commonplace, and they are eager to buy strong stocks on any dip.
That being said, when the market is acting weak and the shorts are in control, momentum is also bear's best friend. What's great about momentum trading is you can count on the same stocks for high-probability setups on the way up and on the way down.
Just take a look at the recent chart for Netflix (NFLX) to see exactly what I am talking about. Momentum-based long traders took shares of NFLX all the way up from its January low of $319.70 to its March high of $458 a share. This stock was uptrending strong during that ride, with shares consistently making higher lows and higher highs, which is bullish technical price action. It was clear the bulls were in full control of NFLX, and the shorts were continually getting squeezed out of their positions.
Fast-forward to mid-March and you'll see how momentum changed on a dime for shares of NFLX. The stock topped out at its 52-week high and quickly started to roll over. The trend changed for NFLX, and the stock started to make lower highs and lower lows, which is bearish technical price action. The selling volume picked up for NFLX as it sliced below its 50-day moving average, and the downside momentum has now taken this stock to its recent low of $349.88 a share. That's a 100-point drop for shares of NFLX in less than a month. As you can see, momentum cuts both ways on popular trending stocks.
One hot momentum stock that might be ready to fall into the hands of the bears and possibly get smacked down hard just like NFLX is First Solar (FSLR), which provides solar energy solutions worldwide. First Solar has a market cap of $6.8 billion and trades at a reasonable valuation of 18 times trailing price-to-earnings and 15 times forward price-to-earnings. First Solar also commands a strong balance sheet, with $1.76 billion in cash and just $225.59 million in total debt. Analysts' growth estimates for First Solar are projected at 78% for next year, which is well above the industry average rate of 18%.
From a fundamental standpoint, FSLR looks strong -- but for momentum traders, that's not our concern. The trend and price is what matters most when we're trying to predict a stock's next move. Many traders miss high-probability setups because they struggle with separating those two elements. The trend is your friend until it ends, and nothing is more important with popular momentum stocks then identifying the prevailing trend.
If you take a look at the chart for First Solar, you'll see that this stock broke out in March with monster upside volume above a number of key resistance levels at $59.44 to $61.85 a share and then above $65.99 a share. That breakout was no joke, and shares of FSLR continued to soar tagging its recent 52-week high of $74.84 a share. Volume was strong for a number of trading sessions after FSLR broke out, but then the stock entered overbought territory once its relative strength index was solidly above 70. Shares have struggled since then.
Shares of FSLR have now started to sell off hard from its $74.84 high with the stock hitting its intraday low on Thursday of $67.64. What's interesting here about FSLR is the stock made a shorter-term lower high at $72.79 off its first bounce, and its relative strength index is starting to make lower highs. Also, its moving average convergence/divergence indicator is starting to flash a major warning sign that a bearish crossover is just around the corner. From a trend perspective, shares of FSLR look ready to turn rapidly from bullish to bearish, and a large drop lower could be in the cards.
Traders should now look for short-biased trades or simply to sell their long positions if shares of FSLR break below some key near-term support levels at $67.17 a share and then below its previous breakout level at around $66 a share with high volume. Look for a breakdown below those levels with volume that registers near or above its three-month average action of 5.22 million shares. If FSLR breaks those support levels with volume, then this stock could easily get hit hard and trend down towards its 50-day moving average of $57.57 a share. My first target would probably be $60, though, since thats another previous breakout level that could turn into new support.
I have a sneaking suspicion that neither of those support levels are going to hold and the price action for FSLR is about to get very ugly. One of the main reasons for this is because this stock is loaded with shorts. The current short interest as a percentage of the float for FSLR is very high at 14.6%. Just like momentum stocks, short interest cuts both ways. The shorts will start to get more aggressive if they take back control of FSLR and blast it below those support levels. And the shorts have another trend on their side, which is the weak action in the rest of the solar sector.
When you dig into the solar complex you'll see that very few momentum names have been able to hold off the bears. Just look at the chart for SolarCity (SCTY) -- which many argue is a better company than First Solar -- as a window into what could be coming for FSLR. Shares of SCTY have been destroyed after hitting its recent high of $89.35 to its low of $56.62 a share. The bulls failed to defend SCTY and I believe they're about to fail with shares of FSLR.
What could change my mind on FSLR? If this stock recaptures those recent highs at $72.79 to $78.84 a share and takes them out with volume, then all bearish bets are off. However, if FSLR were to bounce back and trade near those levels but close at another lower high, then I would say it's really time to put a fork in FSLR.
The bottom line: Shares of FSLR look ready to follow the rest of the solar sector, which has been hit hard by the bears. If those key support levels I highlighted are taken out with volume, then shorting or selling this stock will be the prudent move. If FSLR bounces in the near-term, it will still be a short candidate if we don't take out the recent highs with strong volume or it makes another lower high.
-- Written by Roberto Pedone in Delafield, Wis.