Led by its top two components, Enphase (ENPH) and Solar Edge (SEDG), the Solar Energy ETF (TAN) followed a bullish signal from the Trend Composite with a big breakout to confirm a large bullish reversal pattern.
Let's start with the Trend Composite, which aggregates trend signals in five trend-following indicators. The chart below shows TAN with the Trend Composite (top window) turning positive on July 8th when three of the five trend indicators were bullish (+1). It is now at +5 because all five trend indicators are on bullish signals.
On the price chart, TAN formed a large Double Bottom from February to May and broke the intermittent high with a surge above 80 last week. The Double Bottom lows show demand (buying pressure) in the 55-60 area (green arcs). The intermittent high represents a resistance zone where supply (selling pressure) prevailed in April (red shading). TAN was also turned back in the 80 area in early June. Last week's breakout means demand has conquered support and the trend has reversed.
What now? First and foremost, traders need to manage expectations. TAN fell around 40% from December to February, the swings within the Double Bottom were more than 20% and the ETF was up some 19% last week. Traders should expect volatility and consider this when sizing their position. Second, the short blue line shows the ATR Trailing Stop at 72.87, which is 4 ATR(22) values below the highest close since the Trend Composite turned positive. This stop is around 15% below Friday's close. Third, the breakout zone (red shading) turns into the first support zone to watch on a throwback. A dip into this zone, should it occur, could offer a lower risk opportunity to partake in the breakout.
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Arthur Hill, CMT
Chief Technical Strategist, TrendInvestorPro.com
Author, Define the Trend and Trade the Trend
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