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Over a month ago, I claimed that First Solar (NASDAQ:FSLR) is just a trading stock, meaning that sentiment would primarily drive the stock and both bears and bulls would find great setups to trade. In this time, the stock has gone essentially nowhere but it has gained as much as 28%, lost all those gains and then jumped up 33% before stalling again. These quick moves are certainly not for the faint of heart, but they confirm FSLR's station as a trading stock, especially with the stock neatly bouncing between key moving averages. The chart below reviews this action including some major highlights for FSLR since April. Note how recently the stock has twice met stiff resistance overhead from the 200-day moving average and found support from the 50DMA twice since august earnings launched the stock from that support.

click to enlarge image

First Solar bounces around from headline to headline

Source: FreeStockCharts.com

Working in FSLR's favor has been the on-going rally in the S&P 500. FSLR is a component in the S&P 500 (perhaps not for much longer), and the stock bottomed in June with the rest of the market. However, FSLR's failure to print a fresh high in mid-September as it failed for a second time to break through resistance at the 200DMA is a red flag. This behavior signals a bearish divergence from the S&P 500 which now sits near 5-year highs. Moreover, FSLR declined 14% last week on no new major headlines while the S&P 500 remained essentially flat. I am now watching for a break below the 50DMA to confirm that FSLR's last rally has come to an end. FSLR is exhibiting a loss in momentum somewhat similar to what I observed back in February of his year, prompting me to write "The Solar Fun Is Done For Now." FSLR's uptrend at that time broke down even as the S&P 500 was still rallying strongly. The news of Energy Conversion Devices bankruptcy seemed to all but confirm the bearish signal.

The one positive about FSLR's rally has been it occurred despite a steady increase in short interest. From the June lows to August 15th, shares short in FSLR steadily rose from 21.6M to 31.9M shares. In other words, the rally over that time was NOT from a short squeeze. At the end of August, shares short declined for the first time (over a two week period) since April. It is hard to guess whether that 8% drop in short interest had anything to do with the 28% gain within those two weeks since FSLR lost all those gains in just two days of trading before the last reported settlement date for short interest. The next report on short interest will cover the first two weeks of September during which FSLR rallied sharply. So, I will be VERY interested to observe whether short interest declined, thus implying a short squeeze may have finally started. I suspect only a short squeeze can provide much of an upward catalyst for FSLR in the coming weeks until more clarity comes from November earnings or perhaps even the annual guidance update which typically occurs in December.

Over the past month, I traded the gyrations in FSLR by purchasing October calls married to September puts. I am currently positioned with October calls and October puts (a same-month "strangle"). Implied volatility is high but remains in-line with historical volatility, so I think the current premiums are "fairly priced." I fully expect FSLR to make at least one more 20%+ swing (either up or down) in the next month given the current setup.

I also still think FSLR presents major upside opportunity if it manages to survive in the coming year. I still prefer to play that longer-term potential by selling long-dated puts despite near-term price targets on FSLR as low as $9. For example, the January $20 put expiring in 2014 is selling for $6.25/$6.80 (bid/ask). This provides protection to almost $13 on FSLR with the additional benefit of allowing the seller to largely ignore the kinds of gyrations FSLR has experienced in recent months.

Regardless, whether you are bearish or bullish on FSLR, I continue to expect the stock to provide each camp profitable setups in the coming weeks (thus my choice to hold both puts and calls). The current advantage rests with the bears unless FSLR can hold the rising 50DMA as support and/or unless shorts are finally starting to unwind their death grip on the stock (58.4% of float). Some insider buying would be another positive sign, but I suspect such transactions will not happen before FSLR issues its guidance for next year.

Be careful out there!

Source: First Solar's Latest Rally Is Losing Momentum

Additional disclosure: I am long FSLR via long calls and short puts. I am also long puts.