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This Explosive Sector Could Have Another Double-Digit Rally in Store

Jim Woods

The unexpected news from volatile alternative energy trading favorite First Solar (FSLR) caused quite a stir on Wall Street on Tuesday. The solar panel seller's shares spiked more than 45%, as investors reacted aggressively to the company's full-year forecast for 2013 earnings per share (EPS) of $4 to $4.50 a share.

Perhaps more impressive was the company's projection for full-year net sales to be around $3.8 billion to $4 billion. Analysts were only expecting the solar firm to earn $3.51 a share in 2013 on sales of approximately $3.1 billion.

The action in FSLR was intense, actually triggering Nasdaq circuit breakers, which caused a brief trading halt in the stock. Much of the volume was due to short-covering in the stock. Many traders have been betting that solar stocks were overdue for a big pullback and had no idea that a company in the space would actually come out with such a bullish fundamental forecast.

FSLR Stock Chart

For traders looking at the stock today, the spike higher in FSLR shares is likely too big to chase. Although the fundamental underpinnings of the stock are stronger than most thought they were, the shorts sent the shares for a run higher that's going to be hard to sustain for an extended period.

Still, the unexpectedly strong fundamental news for First Solar could mean there is opportunity in the sector for traders who want to play momentum in the space.

One way to do this is via the solar sector exchange-traded fund (ETF), Guggenheim Solar (TAN). This fund's performance is pegged to an index comprised of 22 companies in various parts of the industry. Of course, the fund has stocks in the actual solar energy sector, but it also has a smattering of technology and industrial sector stocks.

The Guggenheim Solar fund's top 10 holdings make up almost 70% of its total assets, and include China-based GCL-Poly Energy Holdings Limited, MEMC Electronic Materials (NYSE:MEMC), SunPower Corp. (SPWR), Power-One (PWER), and of course, the big mover of the day, First Solar.

TAN Chart

The chart here of TAN shows the big gap higher in the shares during Tuesday trade that took the fund up almost 15%. I suspect that the upbeat forecast in First Solar is the kind of catalyst this sector needed to bring buyers back into the space.

Moreover, the buying today in TAN sent the stock above both its 50-day and 200-day moving averages. This bullish technical trigger will likely help traders profit in the months to come.

Recommended Trade Setup:

-- Buy TAN at the market price
-- Set initial stop-loss at $16.83, approximately 8% below current prices
-- Set initial price target at $20.70 for a potential 13% gain in two months

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