[Editor’s note: This story will be updated each week with new stocks and analysis. Please check back often for Mark’s latest take on marijuana stocks.]
Yesterday I heard an investor say that technical analysis is like reading tea leaves. I am not surprised by this because most technical analysts do not seem to understand just what it is that they are supposed to be doing.
These analysts look at charts and mindlessly identify patterns without understanding what they are supposed to mean. Some even promote esoteric methods like Gann Theory and Elliot waves that institutional traders do not use.
In financial markets, some levels are more important than others. In addition, prices are always doing one of three things. They are going up, going down, or staying the same. If understood and used correctly, technical analysis should illustrate these levels and trends.
Understanding these dynamics can help you profit. Short-term traders need to know which levels are important in order to be successful. Long-term investors can benefit by having a better understanding of where to place their buy and sell orders.
For example, suppose that you buy a stock at $20. The market starts to go your way and you plan sell it when it gets to $30. A look at a chart may show that there is significant resistance at the $29 level. This means that your stock may never get to $30. It may rally and hit the resistance at $29 and then sell off and drop back to $20. If you were waiting for $30, you would have missed out on making a significant profit.
Here are some interesting dynamics that are playing out in seven marijuana stocks.
Technical Levels in Marijuana Stocks: Trulieve Cannabis (TCNNF)
Trulieve Cannabis (OTCMKTS:TCNNF) develops medical cannabis products. The classic head & shoulders pattern continues to play out in TCNNF.
Like most things in technical analysis, this pattern is widely misunderstood. Most of the alleged H&S patterns that I see in the financial media are not actually H&S patterns.
First of all, the head and shoulders pattern is a reversal pattern. That means it needs to come at the end of a meaningful trend. There is no such thing as a head and shoulders continuation pattern, at least by a classic definition. The left shoulder here formed after a 50% move in two months. That is clearly a meaningful trend.
Second, the volume needs to support the pattern. Most volume has to be in the left shoulder or head. This increasing volume means the smart money is selling their positions to the buyers that are late to the rally.
Once we get to the right shoulder, the volume drops. This is because most buyers have completed their orders. Since there is not sufficient buy interest anymore, the stock price will eventually drop.
The traditional way to determine a price target with a head-and-shoulders pattern is to take the distance from head to the neckline and subtract it from the neckline. In this case, that would suggest TCNNF will continue to decline.
Cronos (NASDAQ:CRON) grows and sell marijuana.
Last week I discussed the importance of the $14 level to CRON stock. It has been a support level since May. On July 12 and July 15, that is almost exactly where the low trades were. Had you bought it, you would be looking at a nice profit as it is now trading above $15.
The reason why the $14 level is support is because it was a resistance level during last September and December.
How does a level that was resistance become a support level?
There are two types of sellers. There are short-sellers and there are sellers who are selling stock that they hold. The people who sold at $14 were feeling pretty good after the stock went down. The short-sellers were looking at a profit and the long sellers think they made the right decision.
Then the stock rallies above $14. Now the short-sellers are losing money and tell themselves that if it comes back to $14, they will by it back. Those who sold their shares now think that they made a mistake and tell themselves if they can, they will buy it again at $14.
Meanwhile, those who bought it at $14 wish they bought more. They tell themselves if it comes back to $14, they will add to their positions. Added to this are professional traders who see a clear level to trade off of.
The buy interest of these four groups at $14 creates the support level.
Canopy Growth (CGC)
Canopy Growth (NYSE:CGC) grows and sells marijuana.
The gap that I spoke about last week in CGC stock is refilling. The action here shows how what gaps up may gap down, and vice-versa.
When a stock makes a big move in a short period of time, traders say “it gapped up” or “it gapped down”. You can see that Canopy Growth stock gapped up in early January when it rallied from $30 to $40 in just a few days.
Now that you know how support levels form, it is easy to understand why gaps refill. Those who sold a stock at a particular level buy it back if the stock rallies and then retreats to that level.
When a stock gaps, it does not spend much time trading at the levels it gaps through. Because of this, there isn’t enough time for buy interest to be created, so meaningful support does not form. This is why when a stock gaps up through a range, it may later gap down through it. That is what we have seen with CGC stock.
Emerald Health Therapeutics (EMHTF)
Emerald Health Therapeutics (OTCMKTS:EMHTF) is a pharmaceutical company that makes cannabis products.
EMHTF is testing support at the $1.75 level. This level was also support in December. If you like the long-term prospects of the company, this is probably a good time to buy it.
There is a story here that may be a very bullish dynamic for this company. Emerald Health just announced that it has received its cultivation license from the Canadian government for a large outdoor cultivation area.
Investors are starting to realize that growing outside is substantially cheaper than indoor or greenhouse growing. There are advantages to these more expensive methods, such as enhanced security and better quality, but the cost advantages of outdoor growing more than offsets them.
This move into outdoor growing may show that the company is positioning itself for the future.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) is a life sciences company that owns and manages licensed cannabis businesses. And CURLF stock shows us the concept of a trend.
There is considerable confusion around trends and trendlines. In fact, I recently saw one well-known technical analyst say that trendlines are not valid. I have no idea what he is talking about.
In financial markets, prices are either going up, down, or staying the same. When they are going down the forces of supply are in control. When they are rising the forces of demand are in control. When prices are not changing the forces are equal.
If properly used and understood correctly, trendlines should simply be a graphical illustration of these dynamics. Of course, it takes some practice and experience but they are not “mathematical absurdities.”
Here we see that the forces of supply controlled the CURLF market from May until this week, when the downtrend line was broken. This simply means that the forces of supply may be taking over, or at least equalizing with the forces of demand.
Aphria (NYSE:APHA) grows and sells cannabis, and APHA stock continues to trade between resistance at the $7.30 level and support around the $6.25 level. It looked like it was going to break recently, but then the stock became oversold and rebounded.
If the support at $6.25 breaks, it will probably become a resistance level. This happens just as explained in the Canopy section, except going in the opposite direction.
As multiple groups of sellers converge on one area in the chart, resistance forms.
CURE Pharmaceutical Holding Corp (CURR)
CURE Pharmaceutical Holding Corp (OTCMKTS:CURR) develops and manufactures drugs and drug delivery systems.
The action here once again shows how a resistance level becomes a support level. We identified this level last week. If you bought it you would be up over 10%.
I find support and resistance level to be amazing things. Few people appreciate them. Academics say they shouldn’t exist but clearly, they do.
Resistance and support levels are really illustrations of mass psychology. Some exchange-traded funds or stocks have literally millions of share holders. Each one of these holders has their own agenda, yet somehow their combined actions create clear levels in the markets.
Even after studying the markets for over 20 years I still can’t fully comprehend how or why this happens. It reminds me of how ant colonies move to find new nests. Every individual ant just does its own thing, yet somehow the combined actions of millions of ants moves the colony.
Now there is something to think about the next time you use some of these companies’ products.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.