Aurora Cannabis (NYSE:ACB) stock had two recent failed attempts at breaking out from $8 per share. This is a level that has been pivotal since January of 2018 so it’s not a surprise to find it sticky here. But this resistance remains the opportunity for the next few months.
Clearly the bulls and the bears are in a heated battle over the short-term future of Aurora stock. That is why they keep chopping around these levels. But the important thing for the bull thesis is for ACB to hold its support. Otherwise, the sellers will take control of the reins and the bulls would have to fall back and reset for another set of attempts.
I consider this opportunity primarily a swing trade for a momentum stock. These are volatile tickers that move fast in either direction, which makes them tricky to trade without either complete faith or proper knowledge of levels.
While I do have some faith that the cannabis industry has a good future ahead, I don’t have blind faith that it will. So in this case I must plot the short-term lines that I see here for ACB stock.
I need to clarify that the battle though fierce now, year-to-date the ACB is up almost 50%. So this is not the case of a struggling stock. The point from today is to catch the next big burst. The battle here is important for both sides because the breach on one side will carry momentum in that direction.
My hunch is that the bulls will eventually prevail and the upside opportunity for ACB is to target a new high. There will be resistance at $8, $9.25 and $10.40 per share. The current ACB price pattern is a sharp descending wedge knocking against a flat floor. Often these resolve themselves upwards especially if there is no new specific reason to sell the stock.
First the Fundamentals for ACB
The whole sector is exorbitantly expensive. The valuations are completely insane but that’s because we don’t yet have a baseline. This is similar to the chase of eyeballs into the dot-com bubble. Only this time we actually do have a market and products so there is actual income flowing into Aurora and other pot stocks.
The very fact that legitimate companies like Constellation Brands (NYSE:STZ) and Altria (NYSE:MO) are investing billions into pot companies like Canopy Growth (NASDAQ:CGC) and Cronos (NASDAQ:CRON) is proof enough that there something there.
The potential comes from the fact that ACB and the gang need to expand their capacity in order to satisfy the incessant demand that we know is there. But the bigger upside reset will probably come from legislative changes.
More and more countries are legalizing cannabis. The U.S. is still lagging even though some states took the plunge individually. Once federal regulations in the U.S. change they open the door for companies like Pepsi (NYSE:PEP) to invest in cannabis then the interest in them turns into a feeding frenzy.
One thing is not in doubt: Cannabis has very devout fans. This is true for traditional recreational use, edibles and the expectations of drinkables. Medicine is also incorporating cannabis in many formats. I am also noticing more advertisement for topical spreads which are not yet constrained by the regulatory bodies in the US.
Trading ACB Stock
If I am already long ACB stock, I just look away for a few months. But for those who have complete faith in the concept and believe that it’s only a matter of time before the stars will align for pot stocks, they need to simply plug their noses and buy the ACB shares here. This is a long-term bet that the concept will grow into its valuation.
After all, this is an industry that is like a newborn, so young that it’s eyes are still shut. It is impossible to short the future prospects of the sector so soon so the bottom — regardless of ACB fundamentals — should be shallow. The hopium is still too big.
For the short term, the bulls and bears for ACB are playing tug-o-war between $7 and $8 per share. So far the floor has held but the risk now becomes that the action forms a neckline that must hold. Else the sellers prevail and overshoot to test the next support zone around $5. This would be a dip I’d buy.
The bottom line is easy. Both sides of the opinions on Aurora stock are passionate. But for now it’s impossible to deny the upside potential of such a young company. So it becomes a matter of time before the bears get tired and the bulls overwhelm them on the charts. So I’d rather be long than short this one for the next year.
Another way to go long ACB without committing to the full price of the stock now is to sell December $6 puts and let time do the work. This way I get paid today for the opportunity to own the shares at a 18% discount from now.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
