Solar energy is bound to be in our future. There’s a kind of inevitability about it. – Jim Inhofe
Clean energy had a tough decade. But the industry perspectives attract many investors. According to a Bloomberg report, almost half of global energy consumption will come from renewable sources by 2050.
It should come as no surprise as one of the best performing ETFs this year that the Invesco Solar ETF (TAN) almost tripled off its bottom. It surged more than fifty percent, and the question on everyone’s lips: is the bounce over?
A recent Lead-Lag Report outlined the different performances of the clean energy and traditional energy sectors. Will this decoupling continue?
From a fundamental/legislative perspective, a tax credit is due to expire this year. Up until the end of 2019, citizens can deduct almost a third of installing a solar energy system from federal taxes. In 2022, that’ll drop to only 10%.
However, industry specialists argue that solar reached critical mass. More precisely, it became cost-competitive without the need for government subsidies.
But this is also a cyclical industry, following closer the economic developments in the country. In periods with an acute economic backdrop, there aren’t many new construction projects.
Plus, the unexpected may always strike – i.e., Trump’s 2018 30% tariff on solar imports. Add to this the influence the price changes in oil and natural gas has, and you have a mixed fundamental picture with no clear path ahead.
And here’s the technical perspective.
While the 2019 rally is obvious, TAN is still 85% from the top. Moreover, it stalls in the middle of an interesting range between the 2013 lows and the relevant support/resistance area.
The $45 level acted as strong support on the way down. The 2013 bounce ended with a double top on previous support becoming resistance. But the rejection wasn’t strong enough for the price to make new lows.
In fact, the price formed a triangular pattern the broke higher in 2019. It looks constructive for a new test at the resistance. But considering the fundamental challenges, it may be wise to wait for a pullback.
Only a pullback to retest the lower edge of the triangle offers a risk-reward ratio that makes sense – targeting the resistance ($45) while having a stop-loss at the lower edges of the triangle (10).
With the adoption of solar power on the rise, this is an industry many want to have an exposure to. But high costs, unpredictable legislation, and the technical picture call for a conservative approach.
Count your steps before jumping in. A pullback is just healthy.
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