Gold Stock Bull

I have been watching Renesola (SOL) since it was first listed on the New York Stock Exchange back in late January. I bought my first round of shares at $11.60 and watched the stock price drop below $8 without breaking a sweat. I believed in the fundamentals of the company then and I still do now. Of course, Renesola stock did not stay below $8 for very long and when it broke toward the $9 mark, I bought a significant number of shares for $8.90, recommended the company in the April edition of my newsletter Road Less Traveled and alerted subscribers that solar shares had put in a bottom. In the following three weeks, shares of SOL shot up 74%. While the entire sector has realized a lift in the past month, Renesola, along with SunPower (SPWR), have led the way. Another competing solar wafer manufacturer, MEMC Electronics (WFR), is actually down about 10% over the same time period.

Renesola is engaged in the manufacture and sale of solar wafers and related products, which are integrated into photovoltaic cells, the principal component of crystalline solar panels. Its customers include global manufacturers of solar cells and modules, such as JA Solar, Motech Industries, Solarfun Power, Suntech Power and Topco Technologies.

I like Renesola because they are one of the lowest-cost manufacturers in the industry, have secured long-term supply contracts (mitigating margin risk) and have an impressive list of customers. Their stock is trading at a steep discount to its peers and the company has increased earnings by nearly 70% during fiscal year 2007. They are under-promoted and not nearly as well known as their counterparts in the solar industry and amongst U.S. investors in particular. And lastly, Renesola just announced a 6-year deal to supply two Chinese companies with solar wafers starting in mid-2008. The future is bright indeed, with some analysts setting a price target of $25 or more by the end of 2008. Let’s take a look at the stock’s performance since being listed on the NYSE.

Renesola stock is starting to look overbought, but if the market can hold and break through current levels of resistance, I believe solar stocks will continue upward and outperform all other sectors. However, the markets are coming upon strong resistance levels that could spell the end to this mini-rally. Traders would be wise to have cash on the sidelines and await direction from the market as a break above resistance or another failure at this level will lead to a sharp move in either direction. Take a look at the chart below to illustrate just how important the Dow resistance around 12,750 will be.

If the Dow fails to break this resistance and is turned down again, we will likely see a drop to the bottom line of the trend channel (approximately 11,000) in a hurry. This would represent a decline of 13% from current levels. I bet this is the direction things will turn, but I prefer not to gamble too much and to simply wait for the technical set up and go with whatever direction the market chooses. I am not biased. Yes, we might miss a bit of the action, but the move is likely to be strong in either direction so not much will be missed.

If it breaks through resistance and closes two consecutive days above 12,750, I am going long solar stocks and increasing my position in Renesola. If the Dow is turned away at 12,750 for the fourth time in three months, I will be adding to my positions in the following ultra-short ETFs: SRS, SKF and QID. There are profits to be made in the markets at all times and particularly when stocks are moving so violently up and down. Swing trading opportunities abound in the solar, precious metals, real estate and financial sectors.

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Gold investors get nervous every time a correction materializes and gold fails to add another $20 every week. The “barbaric relic” crew comes out of the woodwork to denounce precious metals investing and proclaim that the commodity bull market is over. These are likely the same experts that have called a bottom to the financial and real estate markets every week for the past 6 months.

I enjoy technical analysis and enjoyed coloring as a child. I hold them in similar esteem. Nevertheless, let’s color on the gold chart and see what stories are told.

First, take note of the longer-term trend channel in blue. This channel has been in place since late 2006 on this chart and with a few minor outliers, holds true all the way back to April of 2004. This is the channel that should be of most concern to gold investors, not the manic channel (green) which was an anamoly caused by a prolonged period of consolidation (black box). Consolidations within long-term secular bull markets can be thought of as springs being coiled. The longer the consolidation, the more potential energy is stored and the more explosive the next upleg will be. This phenomenon and technical set up was pointed out in previous articles and unfolded as expected. It is interesting to note that the latest upleg lasted almost exactly as long as the previous consolidation.

The current correction has brought the gold price to the bottom trend line of the manic channel and upper limit of the long-term channel. Whether gold bounces off the bottom trend line and continues with an accelerated price advance or drops back into the long-term channel is anyone’s guess. But what is important to note is that although the recent correction was painful for many gold investors, it is healthy and completely within the scope of the longer-term projection. In fact, the bounce of the Fibonacci 61.8% retracement level ($900) is quite bullish and if it holds, could see gold remain in the manic channel and push back towards $1,100 in short order. However, if the $900 support fails again, we will see $850 in a heartbeat. This level represents not only the 50% Fibonacci retracement, but also the bottom trend line of the long-term channel. It is very strong and very important support.

So there is no reason to be antsy or worried at this particular juncture. Gold is catching its breath and will either return to the explosive growth of the past few months or return to its long-term channel for a more orderly advance. I have maintained my core position, but am waiting on the sidelines with extra cash. In the short-term, I will look to buy as gold pushes towards $950 or sell if $900 support fails. Either way, my mind is at ease and yours should be too.

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