Stocks quoted in this article:
Shares of First Solar, Inc. (NASDAQ:FSLR) have been in quite the downtrend, shedding over 90% of their value since making an all-time high in 2008.
Fundamentally, the company went from the "next big thing" among energy stocks about five years ago, to being considered the "dead money" it is today. Solar technology, in general, is considered to be inefficient and doesn't make good economic sense, in that the payback period for purchasing such technology far surpasses the life expectancy of the unit itself. Simply stated, the idea of solar technology is much more appealing than the implementation itself. Over the past few years, FSLR has seen a decrease in its new orders, government subsidies, and growth projections for future projects. Until there is some breakthrough made in the technology itself, solar panels should be used for powering calculators, what it has done best for decades.
Looking at the chart below, you'll notice the extreme volatility in recent weeks. There has been a good deal of news that has surfaced on the name and, as expected, stocks that have over half of their float sold short (currently 53%) experience very violent periods. However, with volatility comes opportunity.
The 20-day moving average has been very significant on this stock for some time. After capping FSLR for most of 2012, it has ushered the equity higher for the past few months. With FSLR rallying back into this trendline, a short entry here could prove to be ideal. Additionally, notice the potential head-and-shoulders pattern that is forming between the beginning of August and now. These patterns often signal bearish reversals, and a little selling could be in order after the recent 100% short squeeze off the lows. (Click on the chart to enlarge).
In addition to the technical 20-day moving average and the 22 level on the name, there is an enormous amount of call open interest at the September 22 strike. This strike currently represents the peak level of calls in the front-month series, with over 15,000 contracts in residence. Market makers who are short these calls have incentive to put a lid on FSLR here as we head into next week's expiration.
Shorting stocks that are already heavily shorted can be a risky proposition, and timing your entry and exit is paramount. Additionally, I prefer to use put options over shorting the stock itself, in that you define your risk as you enter a trade that could potentially move sharply against you. At the present time, the risk/reward is very favorable for opening a put position, and a break above $22.50 would signal that my hypothesis is wrong, and the trade should be exited.