Monday blues is an understatement for New Age Beverages (NASDAQ:NBEV). The company announced that it would acquire food-and-beverage outfit Brands Within Reach, owner of Nestea, Evian and other labels. But with no details on the purchasing structure or even the ultimate price, the markets quickly upended NBEV stock.
It’s just as possible, however, that the setback was going to take shape anyway. In this scenario, traders were simply waiting for the right excuse to make it happen.
Regardless of the true reason behind Monday’s selloff, the move has very likely done some technical damage to NBEV stock. Eventually, this impairment will lead to more downside. Perhaps worse, the cannabis backstory that kept so many overvalued names moving higher appears to have run its full course.
Now, this narrative won’t be useful again as a bullish talking point.
Traders Never Believed
There’s no denying it: New Age Beverages stock rode the cannabis craze. In September, management announced that it would launch a CBD lineup of beverages in the foreseeable future.
This decision followed a well-worn pathway. For instance, the planned joint venture between Constellation Brands (NYSE:STZ) and Canopy Growth (NYSE:CGC), and the partnership between Hexo (NYSEAMERICAN:HEXO) and Molson Coors (NYSE:TAP) forged similar synergies.
However, New Age Beverages arguably beat them all to the punch. The unveiling of its Marley (as in Bob Marley) brand during the fall of last year was a massive catalyst. It pushed NBEV stock from $1.53 to a peak of $9.99 in the span of just five trading days.
A huge swath of traders, however, never really believed that surge was meant to last.
As of the latest look, more than 30% of outstanding shares of NBEV stock (and more than 32% of the float) were held as short positions. These are risky bets that the equity will move lower rather than higher. For perspective, a typical short ratio for a less-hyped ticker might be on the order of (very) low single digits. Even riskier names like Hexo and Canopy Growth are only sporting short interest of 5% and 8%, respectively, right now.
Such a degree of doubt can have one of two polar-opposite outcomes. On one hand, an “upside panic” could force short sellers to buy NBEV stock to close out their bearish position. On the other, all those short sellers could be right, and shares crumble.
Given the shape of New Age Beverages stock for the past several weeks followed with Monday’s move lower, it’s difficult to say the bears and doubters didn’t make the right call. But their party is far from over considering the technical damage done on Monday.
Charting New Age Beverages Stock
Many securities have survived worse than Monday’s 6% setback. But in this case, even the low-volume move lower portends more problems.
Click to Enlarge Chief among the red flags is the way the tumble carried NBEV stock below the lower edge of a converging wedge pattern that had been forming since September’s peak. A close second concern is the fact that the selloff also dragged New Age Beverages stock below a recently developed technical floor around $5.04 (yellow) as well as under its 200-day moving average line (white).
Some bulls are already pushing back, but not enough of them. As long as they’re unable to push shares back above $5.04, the bears remain in control. They’re also well-positioned to take another, more damaging swipe.
As for the profitable short sellers that haven’t bailed out, they’re not likely to do so now. The risky phase of their trade is now in the rear-view mirror. Their next task is pinpointing where the next most likely bottom is now that the previous most-likely floor has been broken as support.
Looking Ahead for NBEV Stock
Eventually, all of those short sellers will have to close out their positions by buying NBEV stock back. But anyone anticipating a short-squeeze rally taking shape in the near future is betting on the less likely outcome.
With a lack of volume following the stumble, a dead-cat bounce doesn’t appear to be in the cards. And with the purchase of an entity that’s outside of the cannabis realm — suggesting there are fewer cannabis-related acquisition options — the bullish case for NBEV stock further deteriorates. That’s because marijuana was the only thing really propping this name up. Even then though, the marijuana narratives weren’t doing a great job.
Monday’s action is likely to be the nail in that coffin, keeping shares subdued for the foreseeable future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.