Chart of the week: is this energy stock at a turning point?

29th March 2021 15:45

John Burford from interactive investor

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As the world drives down carbon emissions, fuel cells have a major role to play. 

The whole world is in thrall to the drive to reduce CO2 emissions, and FuelCell Energy (NASDAQ:FCEL) is an interesting company to consider.

These emissions mostly come from internal combustion engines and power plants. Never mind the associated production of huge amounts of water vapour in this process – the most intense greenhouse gas’ of all (which is conveniently overlooked in calculations of climate change temperatures). But I digress...

One technology to capture the CO2 from power plants that has been in development for some time is the fuel cell, and the company has been working on several iterations of the fuel cell process using various electrolytes.

It has several working prototypes. All it needs is a large commercially operating installation to attract more energy companies to the cause.

Naturally, if this carbon-capture technology satisfies the various green government mandates, it would extend the life of existing coal and oil/gas power plants for a significant cost advantage over installing replacement wind and solar, despite the huge governments grants and tax subsidies available for the latter.

Another intriguing aspect of the company is its work in extracting hydrogen for use as a clean fuel. There is much talk of the scope for using hydrogen to power vehicles, but no large-scale applications have emerged as yet.

Sadly, carbon-capture shares have performed poorly as the initial excitement turned inevitably to dashed expectations. But I believe FCEL is poised to make significant advances now – and the timing couldnt be better. Here is the daily chart:

Past performance is not a guide to future performance.

From the initial lift-off from the $3 (£2.17) area last November, it surged up in five clear waves to the 1 February high of $29 on the excitement generated by anticipated new contracts.

But when these were dashed, the shares fell back in three waves to the current $12 area, which is a Fibonacci 62% of the initial advance – a common retracement of an impulse (five) wave. Also, note the very large momentum divergence at the current c  wave low.

Thus we have textbook conditions for a likely major turn up in a third wave that should exceed the span of the large wave one. 

And given a tailwind then I set a target around the $35 area as a best-case scenario from the current $13. But if the $8 region is tested again, I will be forced to go back to the drawing board.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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