Shares of JinkoSolar (NYSE:JKS) have certainly been on a moonshot lately. The Chinese solar manufacturer has risen more than 200% in the past month, coinciding with a breakout in the solar space. Some of the parabolic move higher was certainly warranted given the falling costs and rising demand. However, the rally has now come too far, too fast. It is time for a red-hot JKS stock to cool off.
InvestorPlace Markets Analyst Luke Lango recently took a deep dive into why solar stocks, especially Chinese solar stocks, are poised for continued upside. He noted how the landscape has dramatically changed for JKS. Actual sales are now driving profits, instead of subsidies. This is undoubtedly a more enduring business model for JinkoSolar.
Valuation multiples have expanded dramatically over the past month but are still reasonable. For instance, the current price-earnings ratio is at a two-year high, but still well under 15x. The price-sales ratio is under 0.5x. InvestorPlace contributor Larry Ramer did a more in-depth fundamental analysis in his recent research piece on JinkoSolar.
So with sales growing and valuations still reasonable, why am I short-term bearish on JKS stock? It all comes down to the technicals. Investors rightfully focus more on fundamentals. Traders are definitely more driven by technical analysis. And from that viewpoint, JKS stock is looking extremely overbought. One look at the price chart is really all one needs to think the rally is getting way overdone.
Getting Technical With JKS Stock
The first sign of this is that the nine-day RSI reached over 90 — hitting the loftiest levels in the past year — before finally flatlining. MACD echoed a similar extreme sentiment while momentum raced to uncharted territory. JKS stock is trading at a massive premium to the 20-day moving average. Shares have been up 13 of the last 15 days. It is rare to see any stock reach these extremes without at least pulling back or even consolidating for a period of time.
Source: The Thinkorswim® platform from TD Ameritrade
More importantly, JKS stock had a key reversal day yesterday. Shares traded up to all-time highs at $59.62 before dropping sharply to close lower on the day at $54.96. This type of price action is many times emblematic of a blow off top. The buyers have become exhausted and the sellers have taken control.
It is an even more powerful signal given the magnitude and extent of the most recent parabolic rally. Waiting for this type of reversal is essential for avoiding entering into a position too early. Entering too early can be deadly in this type of highly volatile market.
Longer term, JKS stock still looks to be a solid investment on the ever-burgeoning solar industry. Shorter term, however, JinkoSolar looks primed for a pullback — if only on profit-taking alone. Shorting the stock outright can be a little risky. Indeed, a fair portion of the last leg higher in the stock may have been fueled by short covering as the pain and losses became too great.
Luckily the options market provides a lower risk, but still very profitable, way to take a somewhat bearish view over the coming weeks. Selling an out-of-the-money call spread is the ideal way to position for a probabilistic pullback.
How to Trade JinkoSolar Stock Now
Sell JKS Nov $65/$70 call spread for a $1.00 net credit.
Maximum gain on the trade is $100 per spread. Maximum risk is $400 per spread. Return on risk is 25%. The short $65 strike is well above yesterday’s all-time intraday high of $59.62 and provides a 18% upside cushion to the $54.96 closing price of JKS stock. The spread also expires before the next earnings date in late December to eliminate any earnings related risk.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.