2 Solar Stocks Ripe for Pairs Trade

06/21/2011 9:00 am EST

Focus: STOCKS

Solar stocks are infamous for not trading in unison, and as one solar play heads higher at the same time another continues to struggle, a captivating pairs trade idea is born.

Solar stocks seem to have great runs and then fall back—like a solar flare! But they do not all trade together, and that creates opportunities because no two flares happen at the same spot at the same time.

Just take a look at how GT Solar International (SOLR) and Hanwha SolarOne (HSOL) are operating.

GT Solar International (SOLR) was one of my top trading ideas for this week and is testing resistance at the top of an ascending triangle at $13.55 after a move higher. If it can get through that resistance, then the target on a measured move (MM) is $16. Short interest is high at about 10%, so it could also benefit from a short squeeze.

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Hanwha SolarOne (HSOL) has been trending lower since September, taking a pause early in the year before continuing lower. It has a base settling in at $5.00 and may be establishing a descending triangle over it. Underneath $5.00, there is support at $4.75 and then $4.50 before a big move lower. The falling 50-day simple moving average (SMA) is providing resistance, but that is quite a ways from the current level.

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One way to play this solar flare and fade is via a pairs trade. Below is the ratio chart of SOLR to HSOL. Notice how it is approaching a triple top from a higher low with a rising relative strength index (RSI) and a moving average convergence divergence (MACD) indicator that is rising as well.

These both support further upside. If it can get through the 2.52 resistance, then the target higher would be a ratio of 3.26.

GT Solar International (SOLR) vs. Hanwha SolarOne (HSOL):

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One trade idea would be to buy 10 SOLR and sell short 25 HSOL on a break above $2.53 with a target of $3.26 and a stop loss at $2.45.

By Greg Harmon of Dragonfly Capital

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