Planning for the Cabot Investors Conference
Low-Risk Buying at Volume Support Zones
A Solar Stock with a New Revenue Model
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I’m pretty proactive when it comes to getting work done: I like to write things ahead of time if possible and I like to have things planned out for the next couple of weeks so I’m not “surprised” by sudden projects. (At least for me, writing takes a lot of mental work, so throwing something together at the last minute is tough.)
That planning stretches out further this time of year; now’s when I start to look ahead and see who’s on vacation when (so I know when I’ll be extra busy) and when I can book some of my own long weekends. I even start looking ahead toward the Cabot Investors Conference in August, thinking about the details of my hour-long breakout session.
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My main presentation at the Conference this year will be about using charts to identify low-risk buy points. That sounds pretty broad, so I’m starting to organize the presentation into categories-i.e, specific patterns on stock charts that usually lead to higher prices. So far I’ve identified four to five patterns (I hesitate to call them that; more like “chart characteristics”), which I think covers most of what I do.
Not surprisingly, one of these patterns involves a stock’s reaction to earnings; it’s no secret that I’m a big fan of earnings gaps to the upside, especially if they come after a stock’s been dead for a while.
But there’s another pattern that, while not directly related to earnings, usually shows up in the aftermath of an earnings gap. And it’s attractive to investors who don’t like buying a stock that’s gapping up 10% or 15% on earnings.
The pattern I’m talking about is what I call “a volume support zone.” And it’s simply this: If you have a stock that’s exploded higher on huge volume (either for one or two days on an earnings gap, or even better, multiple days in a row), the next pullback or two into that zone almost always finds support.
The reasoning is simple: When you’re dealing with relatively liquid stocks, a string of huge-volume up days indicates institutional buying. Clearly, a ton of institutions thought the stock was a good buy in that area a few days ago, so if shares dip soon after, they’ll take advantage of the dip to add a few more shares, supporting the stock.
A classic example is Apple (AAPL) when it was beginning its run in the summer of 2004. There was a gap up on earnings in July, but the market was in a downtrend at the time. So AAPL pulled back ... but found support in that gap area multiple times as big investors accumulated shares.
Then shares spiked higher on big, increasing volume in late August. Once again, as the stock tried to pull back (in September), it consistently found support near the stop of that “volume support zone.” We bought some for the Cabot Market Letter Model Portfolio right then! AAPL eventually soared on earnings in October and never looked back.
Even though it’s logical, most investors don’t use this type of action to buy because they’ve mentally written off a stock that has just surged a bunch-it seems “too high.” But experience has shown me that it often provides a chance to get into a new winner ... and is often the last chance before buyers really pour in.
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How about an example of a stock that looks buyable right now? I don’t see a ton of set-ups in this area-mainly due to the choppy market, but there is one stock I’m very intrigued by ... and it’s something that (loosely) fits in with Tim Lutts’ Wealth Advisory earlier this week.
It’s First Solar (FSLR), and here’s what I wrote about it in this week’s Cabot Top Ten Trader:
“First Solar was one of our biggest winners ever back in 2007 to 2008, but honestly, we’ve never found much to get excited about from the company in recent years-earnings have been very erratic over the past few years, mainly because the firm’s focus on utility-scale solar projects lends itself to big (but one-time) payoffs once they complete the deal. Now, though, First Solar, along with many other solar players, are thinking bigger-the big news of late is that the company is partnering with SunPower to form 8point3, a new yieldco (not yet public) that will own and operate many of the plants that both companies construct; at the outset, 8point3 will operate 432 megawatts of solar assets (mostly utility scale plants) and the “drop down” pipeline should be huge. Thus, while the upfront money will be far less, First Solar’s meaningful ownership stake in 8point3 should result in recurring revenues for years to come; the average contracts of 8point3’s plants is 21 years! Moreover, First Solar is rolling out its own new service to operate, monitor and maintain powerplants for other companies; it’s starting with 40 megawatts under this operation but that should also grow markedly in the years ahead. Sales and earnings are still lumpy, but the focus on new, recurring-revenue businesses and operations may change the company’s business in a big way.”
That yieldco announcement came in February, and as you can see in the chart, it caused a big gap up ... and then continued its big-volume gains for the next few days. And look at what the stock has done since then-it’s generally gone straight sideways (with a couple of brief forays to higher levels), as every dip found support in the “volume support zone” (roughly from 57 to 60). With the 50-day line approaching, I think you could start a position in FSLR around here and look to add on a decisive pop above 64.
For further updates on FSLR and additional momentum stocks, take a trial subscription to Cabot Top Ten Trader. The advisory features a wide array of stocks and sectors you can benefit from in as little as 30 days. Our most recent issue features a diverse mix of strong stocks, including a recent IPO that has the opportunity to bring you double-digit returns in the weeks to come. Click here for more details.
Sincerely,
Michael Cintolo
Chief Analyst of Cabot Market Letter
And Cabot Top Ten Trader
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