NOVA - Solar Sector Setting Up For Explosive Recovery Rally (Technical Analysis)

2023-11-20 12:59:03 ET

Summary

• The solar sector is heavily beaten down and a nice confluence of factors are supporting an explosive recovery rally in the sector.
• Some leading solar stocks are already breaking out of bases, and are showing strength despite missed earnings. These are tells that the sector has bottomed out.
• The high short interest in some solar stocks could add buying pressure and fuel the recovery rally.
• The Invesco Solar ETF would be a good ETF to gain long exposure to the solar sector.

Solar sector setting up for explosive recovery rally

The solar sector has been heavily beaten down and neglected, with the sector ETF ( TAN ) down close to -65% from its 2021 highs and trading at a key support area.

With small caps resurgent after November's US CPI underwhelmed, this could lift the overall breadth of the market, including solar stocks.

A handful of solar stocks are already starting to lead the sector higher. They are breaking out from bases, and are seeing strength despite missed earnings expectations.

This is a sign of a near-term sector bottom, and it pays to focus on the first 2-3 names that breakout ahead of the pack. I expect these leading names to outperform the sector in the months ahead.

To add rocket fuel to the mix, some of the solar names have attracted high levels of short interest. These short positions have to be covered quickly if the trend changes, which means more buying pressure.

Without further ado, I will go through the charts that substantiate the above points.

Solar sector ETF trading at key support area

The Invesco Solar ETF broke out of a huge 9 year base back in 2020. As the saying goes, "the larger the base, the higher in space". Breakouts from big bases can be very powerful. After breaking out in 2020, TAN climbed another +170% to its peak in 2021.

Since then, TAN has pulled back by -65% to the familiar breakout area, which was once resistance and now likely support. I expect price to find a footing here.

Monthly Chart: TAN

The recent high in 2021 is nowhere close to the highs TAN made back in 2008. It may be optimistic at this point to expect prices to reclaim their 2008 highs, but even a move back to the 2021 highs represents a +175% rise.

Small caps resurgent, which may benefit solar stocks

The equity market rally has been supported largely by mega-cap technology stocks - the usual FAANG names.

After the November US CPI came in a 4% YoY versus 4.1% expected, small caps saw a powerful lift-off.

The Russell 2000 ( IWM ), used as a proxy for small cap stocks, broke above its downtrend resistance on high volume on 14 November. It closed the day +5.5% higher, which is a huge sign of strength. This momentum is likely to continue higher, and I will be surprised if IWM revisits its pre-CPI levels in the weeks ahead.

Daily Chart: IWM

Small caps seeing strength is a vital ingredient in the sustainability of a market rally, as it means more stocks are participating in the rally. Strength can then rotate across sectors, and spread to beaten-down, neglected sectors.

A rising tide lifts all boats, and solar stocks can be very speedy boats because of how beaten-down they are, and the high short interest in some of the names.

Solar stocks basing and seeing strength despite missed earnings

Stocks breaking out of their bases after a prolonged downtrend, coupled with resilience in the face of missed earnings, are tells that we are looking at a near-term sector bottom.

First Solar ( FSLR ) has broken out higher from a descending wedge pattern, and has pushed above its key moving averages on the daily chart (10, 20, 50 day). I am long at $146 when the stock broke out, and am looking to add.

Daily Chart: FSLR

Sunnova Energy ( NOVA ) missed earnings in October by -62%, but quickly recovered the post-earnings loss. The stock has been basing for 2 months, and is now on the verge of breaking out from this base. Short interested is high at 34% of float. I am long at $10.58, and am looking to add.

Daily Chart: NOVA

Sunrun ( RUN ) missed earnings on 1 November by a whopping -4886%, but shrugged off the loss to climb higher. Stock has risen above its 10, 20 and 50 day moving averages, and has a high short interest of 28% float.

Daily Chart: RUN

These are 3 leading stocks within the sector that caught my eye. In a beaten-down sector like solar, it pays to focus on the first few stocks that are clearly leading the pack.

I believe that the above 3 stocks are likely the leaders, and will outperform the solar sector in the months ahead.

Long exposure via sector ETF

I have long exposure in FSLR and NOVA, and am looking to add on. I am also looking at the sector ETF TAN.

Although it is likely to underperform the leaders, its diversified exposure removes the potential volatility from individual stock catalysts, such as earnings or capital raises.

Although I do not hold stocks through earnings as I deem them to be random events, capital raises can occur anytime without warning.

Below shows the fund holdings of TAN, with FSLR, Enphase Energy ( ENPH ) and SolarEdge ( SEDG ) making up the top 3 largest holdings of the ETF, with a combined 26%.

Fund Holdings - TAN

TAN's benchmark is the MAC Global Solar Energy Index, which it aims to track. As we may observe from the comparison table below, TAN manages to track the index pretty well.

ETF performance vs benchmark - TAN

I covered how TAN was trading at key support levels on the long-term monthly chart. Drilling down to the shorter-term daily chart, we may observe how TAN has put in a mini double bottom base. I am looking for it to break above its 50 day moving average, and to trend higher from here.

Daily Chart: TAN

Overall, I believe we are seeing a nice confluence of events that should support a recovery rally in the beaten-down solar sector.

Market breadth is starting to improve, and the solar sector is providing tells that it is bottoming out (stocks breaking out of bases, resilience after missed earnings).

The recovery rally can be explosive due to the high short interest, and is likely to be led by a handful of leading names (FSLR, NOVA, RUN).

The sector ETF, TAN, is also a good long candidate, as it takes away individual stock risk like earnings and capital raises. It is not a dividend play, but a capital appreciation one. If TAN reclaims its 2021 high, that would represent a gain of +170%.

I would suggest taking long positions in the solar sector through TAN, and / or individual stocks, as the risk-reward looks attractive now.

For further details see: