Wind, Waves and Sun: Just Another Day at the Beach

Or Are They the Next Big Thing in Energy Investment

With the recent rise in oil prices, you've probably been hearing about 'alternative energy' sources and how we should be using them right now because:

a) the oil supply is about to run out

b) we're polluting the planet to the point of no return

c) global warming is going to end civilization as we know it

… and similarly alarmist calls to action. Let's not get into the highly contentious politics of statements like these — after all, the arguments are about as peaceful and gentle as presidential candidate debates between extremists. Instead let's focus on the fact that there are alternative energy-producing companies out there and how we might be able to make some money from their price movements.

Simply put, 'alternative energy' refers to non-fossil fuel energy supplies that typically have low environmental impact, are thought to be renewable and also not believed to have finite supply restraints. Examples include wind, solar, biomass, wave and tidal energy.

Quite a large number of companies have sprung up in this area where previously very few existed. Long term weekly charts for these firms are simply not relevant (or even available, in some cases) as the sector is so new. We could potentially be looking at a sector explosion similar to computers in the 1980s, where an entire industry sprang into existence and made its early investors millions and billions of dollars.

So are we observing the birth pangs of the alternative energy equivalent to the next Microsoft or the next Google? Let's look at some charts and see if we can find out.

The Big Picture: Hot Air or an Irresistible Tide?

As the number of individual companies has grown, so too has a proliferation of indexes and ETF's (Exchange Traded Funds) created to track them as a group. One of the better known of the ETFs is the Global Alternative Energy ETF (GEX) created in May 2007 which tracks a benchmark of 30 alternative energy companies. A full 30% of the fund is large-cap firms and another 30% represents non-U.S. companies to provide truly global exposure.

You can see from this weekly chart that GEX has had a whirlwind ride over the last year but has still substantially outperformed the DJIA (gold line) by some 25%. It’s currently below its newly formed 50 week moving average but is presently holding firm above solid support.

Let's go to a daily chart to get a better look:

Currently GEX is below both its 50 day and 200 day moving averages which is not bullish. However, the three recent lows have risen steadily to the point where it looks like $47 could be the next bottom.

Patient bottom picking should be a good strategy here as the CCI (Commodity Channel Index) is currently just shy of 100. This CCI value has recently indicated a turning point for GEX, as has the -100 level. GEX could be a buy at the $47 price level and -100 CCI level.

Commodities Are Cyclic – And Here's a Yardstick To Measure Them

The Commodity Channel Index (CCI) was designed to identify cyclical turns in commodities with the assumption that commodities move experience periodic highs and lows.

The 'standard' cycle for CCI is 60 days, with CCI itself being set at 1/3 of this value (hence the CCI(20) label on the chart). The line itself is calculated from the typical price (the average of the high, low and close of the most recent period) … a simple 20-period moving average on that typical price … and the mean deviation between the typical price and its simple moving average.

The internal CCI constant is set at .015 to ensure that between 70% and 80% of CCI values fall between -100 and +100, thus giving useful buy and sell zones as seen in the daily GEX chart above.

You would have done quite well selling GEX when the CCI crossed from above the 100 level to below it (i.e. at the end of the 'green zone') and doing just the opposite with the -100 line (and the 'red zone') when buying. By comparison, it is much riskier to buy or sell as the CCI line crosses either 100 or -100 as the price can run a bit farther before turning around. You would need a bigger stop loss for such trades although you would get into more trades overall.

Non-Trends Are Not Your Friend

For comparison purposes, the MACD indicator is also included on this chart as MACD is based more upon trends than cycles. You can see for yourself that MACD crossovers have not been particularly helpful and would have normally got you into a non-existent trend far too late to gain any measurable profit.

MACD's only real value here is when it failed to make a new high in the May 19 period, thus confirming that the price was exhausted despite the higher high relative to the April 21 period. However, this is not a good performance overall and you would have been led astray far too often with MACD. This is as good an example as any of the dangers of using trending indicators in a non-trending market.

A Google-ishly "Hot" Stock?

The largest US listed stock in the GEX ETF is a company known as First Solar Inc. It's actually the second largest GEX holding overall but the top holding is Vestas Wind Systems A/S which trades only on the OMX Nordic Exchange in Copenhagen.

So let's look at the much more accessible FSLR instead. This stock has been red-hot as it's gained a remarkable 150% even as the DJIA has limped along to a -15% performance. FSLR is also close to its 52 week high and has experienced only the mildest of downturns since the market’s May hangover.

FSLR certainly boasts a Google-ishly high share price at $280+ and a 52 week high of $317. There's been a bit of overcast weather hanging over this solar power giant lately, but look how well the CCI oscillator called suitable buying and shorting points — the 100 and -100 areas worked like magic at calling tops and bottoms. Even if you're a buy-and-hold investor, CCI worked admirably at spotting the lowest risk areas to increase your holdings.

It's beyond the scope of this article to go into the fundamentals that might rate FSLR as the Google of the alternative energy world but a large-cap company that's steadily increasing in price is a rare breed in today's market.

And while the overall sector (as represented by GEX) seems to have paused for a breather, it has solid support just beneath its current price and a winning history. Like all commodities, it’s demonstrating a high level of volatility but what else would you expect from an industry based on wind, water and sunny days? The overall direction still points toward long term growth.

What’s more, now you have the CCI tool to help you gauge the swings and stay calm even when others are panicking at supposedly “unexpected” and “unpredictable” price movements.

Good investing,

Nick Thomas
Analyst, Charts of the Week