Rare Earth and Solar Stocks Present Opportunity

01/20/2011 7:07 am EST

Focus: STOCKS

With everyone looking to buy the dips in this market, it sure has been hard to locate one. Traders have continued to show a large risk appetite throughout this rally, and even at extended levels, it's a seemingly never-ending story of people wanting into this market.

Rare Earths Reverse Course

Rare earth stocks were a boon for active traders for the better part of four months at the end of 2010, but have recently pulled in to digest some large moves. The sector continues to remain almost entirely speculative, with Molycorp, Inc. (MCP) one of the only companies with actual earnings. However, with China cutting rare earth export quotas, these companies have ramped up mining preparation efforts in hopes of filling the void.



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Although the rare earths may be a high-risk (and high-reward) trade for long-term investors, they trade well technically and move quickly, both positives for active traders. Yesterday, the two leading rare earth stocks, Rare Earth Resources Ltd (REE) and MCP, staged 80-20 reversals, which means that after several down days in a row, they traded through the previous day's low and back above it. When they crossed back above the previous day's low, you could have bought them with a stop at the low of the day.



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The reversals also tell us that rare earth stocks are ready to climb back toward highs once more. The strategy today would be to buy REE and MCP through Friday's high if they get there, with stops at the low of the day today. Other stocks to watch in the rare earth sector are China Shen Zhou Mining & Resources Inc (SHZ) and Avalon Rare Earth Metals, Inc. (AVL).

Solar Stocks, PWER Heating Up

On Tuesday we saw some solar stocks heat back up after a few days of rest. The leader of the group, First Solar, Inc. (FSLR) surged nearly 6% on its way back toward 52-week highs, while the magnet solar, Chinese company ReneSola Ltd. (SOL), also jumped more than 6%. The resurgence of the solars once again illustrates the sector rotation we are seeing week after week. The rest stage of the bull market cycle is being skipped altogether.

Looking more specifically at positions, power solutions company Power-One, Inc. (PWER) set off a technical buy signal. The stock has been trading choppily over the past couple of weeks, but looks to be working its way higher out of a wedge pattern.



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Don't try to get cheeky looking for shorts at this point as this bull market rumbles on. Earnings continue to support the rally, and valuations remain very reasonable despite the precipitous run.

By John Darsie of T3Live.com

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