The United Nations COP28 climate summit concluded in December 2023 with a statement calling for ‘transitioning away’ from fossil fuels. However, it stopped short of calling for a full phase out of fossil fuels. Will this be enough to lift the sails of beaten down renewable energy stocks? Which sectors or segments will benefit the most going forward? And how are fossil fuel companies likely to fare?
Invesco Solar ETF (TAN)
In the last two months of 2023, TAN showed signs of bottoming, having run up almost 20% from ts long time support around 40.
In the near term, TAN could pull back to 49–51 before taking the next leg higher, allowing for along entry to ride up to 58–60, or around 10% higher than current levels.
Barring any significant catalysts, TAN is likely to stay within the 45–65 range in the coming weeks and months.
A strong break above 60 – 65 will likely signal the start of a longer-term uptrend.
In addition to executing a directional trade with the underlying ETF, traders can also consider capitalizing on short option strategies given current high volatility levels.
1. TAN (ETF)
Long TAN 49 – 51
Take profit at 58.
Stop loss 38.
2. TAN (Option)
Short Put on TAN
Sell 45 strike Put, 16 Feb 2024 expiry
Take profit at 50% of premium collected
Profitable as long as price stays above 45 at expiry
3. TAN (Option)
Short Strangle on TAN
Sell 45 strike Put, 16 Feb 2024 expiry
Sell 60 strike Call, 16 Feb 2024 expiry
Take profit at 50% of premium collected
Capitalize on high volatility by shorting premium-rich options while having a range-bound price view
First Trust Global Wind Energy ETF (FAN)
Faring relatively better than its solar counterpart, FAN is trading back inside its 10-year-old price channel after dipping recently below it from September to November 2023.
FAN is now on the cusp of breaking out of its three-year-old resistance trendline, with a a strong push above 16.5 potentially lifting FAN to 18 in the coming months.
1. FAN (ETF)
Buy FAN on a pullback to trendline support after a weekly close above 16.5.
Take profit at 18.
Stop loss at 15.5.
iShares Global Clean Energy ETF (ICLN)
ICLN’s diversified holdings have spared it from the plunges experienced by any single renewable energy sector
With a portfolio comprising both solar and wind companies, ICLN also includes geothermal and utility companies, as well as both US and global companies.
A strong breakout above 16 – 17 could propel ICLN towards 18 – 19, where it last traded in the first half of 2023.
1. ICLN (ETF)
Long ICLN on a pullback after a monthly close above 16.
Take profit at 18, 19 and 20.
Stop loss at 14.5.
KraneShares Electric Vehicle and Future Mobility ETF (KARS)
One segment likely to benefit from the energy transition are electric vehicles.
Having lost half of its value from its late 2021 peak, KARS is starting to bounce off levels from where it started its post-Covid rally in mid-2020.
In the coming months, KARS could climb 12% to 28, with a further breakout above 30 possibly taking KARS another 10% higher to just under 34.
One benefit of KARS is it offers exposure to non-US exchange traded companies, with seven out of its ten top holdings listed in China, Korea, Canada and Japan.
1. KARS (ETF)
Long KARS on a breakout or weekly close above 26.
Another long KARS on a further breakout or weekly close above 30.
Take profit at 28.5, with stop loss at 24.7
Take profit at 33.5 with stop loss tightened to 28.5.
Global X Lithium and Battery ETF (LIT)
The wider ecosystem for EV-related raw materials and components is also likely to benefit, with LIT offering exposure to Australian, Chinese, Korean and Japanese listed companies.
LIT is currently holding above the 43 price support level and can now potentially climb 10% to 55 from current levels.
If it can power above 53, LIT could rally back to 58 then 65, the level it was trading at just this past August.
As volatility levels in LIT are currently mid-range, a possible option strategy is to capitalize on the above view could be a Covered Call.
1. LIT (ETF)
Long LIT 48 – 50 .Take profit 55 with stop loss at 45.
Another long LIT on a breakout with weekly close above 53. Take profit at 58.5 with stop loss at 50.7.
2. LIT (Option)
Short Covered Call on LIT
Buy 100 shares LIT
Sell 56 strike Call, 16 Feb 2024 expiry
Hold till option maturity
Participate in stock upside till 56 plus option premium
Without a definite commitment to phase out fossil fuels, COP28 has also left the door open for the oil and gas sector to build on longer term strength.
First Trust Natural Gas ETF (FCG)
Natural gas has emerged as a less pollutive transition fuel of choice, especially for users of coal energy.
FCG invests in companies involved in the exploration and production of natural gas, and had recently bounced from its price support around 23.
While it may stay range bound between 23 and 30 in the coming months, a strong push subsequently above 30 could push FCG up to 40 – 45.
1. FCG (ETF)
Long FCG 24 – 25.
Take profit at 29.5, 33 and 40, with stop loss at 19.9.
USCF Midstream Energy Income ETF (UMI)
One of the most resilient segments of the energy supply chain is represented by UMI, which holds companies that store and transport oil and gas.
As the performance of these companies depend on long-term contracts, the ETF’s price is less likely to be subject to the vagaries of the day-to-day volatility in the underlying price of the commodities.
UMI is in a firm, long-term uptrend and is likely to hold above 32 – 34 going forward.
1. UMI (ETF)
Long FCG 32 – 34.
For longer time horizons or buy-and-hold
Instead of gaining at the expense of the other, both fossil fuel and renewable energy sectors could benefit simultaneously.
Fossil fuels are being called upon to participate in the energy transition. The world’s entrenched energy infrastructure built around fossil fuels, coupled with an increased emphasis on energy security, have made them indispensable for the foreseeable future.
At the same time, the demand for low emission alternatives has gained sufficient momentum for renewables to grow swiftly again. The expected easing of interest rates will likely provide respite to many smaller companies who form the bedrock of the renewable energy sector.
Leonard Lee and Desmond Chew have joined forces to complement directional trade ideas with option strategies, across stocks, ETFs, crypto, commodities, bonds and FX. Contact us at [email protected]
Disclaimer: Options @ Roaring Trade complements directional trade ideas from The Roaring Trade with option strategies. All views and trade ideas expressed in this article are solely for educational and informational purposes. Nothing in this article is to be construed as investment or trading advice.
