Shares of Aurora Cannabis (NYSE:ACB) haven’t been looking so hot. In fact, on July 12 alone, shares tumbled more than 5%. But the fall did more than give investors a sour ending to the week. It sent shares through a key level of support and all but put the nail in the short-term coffin of pain.
OK, maybe that’s a little extreme. But the point is that ACB stock is not looking healthy on the charts. While that doesn’t mean Aurora Cannabis can’t bounce back and repair some of that technical damage, it makes it a lot harder to do so.
From an investing standpoint, I like to blend technicals and fundamentals. When the technicals are not strong — like with ACB stock — we need to lean more heavily on the fundamentals. When the fundamentals are not the stock’s strong point, we need the technicals to display strength.
Unfortunately for Aurora Cannabis stock investors, while its end market looks to be a long-term opportunity, its fundamentals are not that strong in the short term. Without technicals to lean on, this stock could have more downside coming.
Trading ACB Stock
Click to Enlarge
With shares of ACB dumping on Friday, the stock lost a key level of support between $7 and $7.25. For the stock to even come close to repairing some of this damage, it needs to reclaim this former level of support.
The risk here is two-fold, with the first being that Aurora Cannabis stock continues to head lower. The second risk is that it rebounds back up to the $7 to $7.25 range, which then acts as resistance. That would be bad news for the bulls.
On Monday, ACB stock was rallying back toward that prior range support, so we should know relatively soon whether it can reclaim this area or if it will be found as resistance. At least we don’t have to wait long to find out.
Should ACB stock reclaim that key support area, it may run up toward $7.50 to $8. But here’s the problem for traders looking to take ACB on the long side. Even if it reclaims prior support, it has to push through this next area too, before looking healthy again. And what’s between $7.50 and $8? Just 2019 downtrend resistance (blue line), the 20-day, 50-day and 200-day moving averages.
I’m not saying ACB stock is the worst equity to buy or that it’s doomed. But until it repairs its technical damage and starts to put together more constructive price action for the bulls, it’s a hard one to go long. Particularly as the PowerShares QQQ ETF (NASDAQ:QQQ) and SPDR S&P 500 ETF (NYSEARCA:SPY) are hitting new all-time highs.
The breakdown in ACB stock was actually preceded by Canopy Growth (NYSE:CGC). CGC stock broke down ahead of ACB and led the way lower for a number of cannabis stocks.
What’s Up With Cannabis Stocks?
So what’s leading this charge lower? Because it’s not just CGC and ACB stock. Cronos Group (NASDAQ:CRON), New Age Beverages (NASDAQ:NBEV), Aphria (NYSE:APHA) and others are all taking a very similar bearish setup.
On the charts, this setup is known as the bearish descending triangle. Simply put, it’s when trend is pushing shares lower against a static level of support. When support gives way, the bearish setup starts to play out, forcing share prices lower.
The question is, why is the entire industry all setting up in the same manner?
Things really started to unravel when Canopy Growth — which many consider the “blue chip” stock of the bunch — ousted its CEO. Canopy was volatile but stable that day, but has been under pressure all month since.
It seems to have turned investors into sellers throughout the group, as the cannabis industry awaits a new catalyst. That’s even as growth has been incredible, with many of these names turning in earnings reports of triple-digit revenue growth gains.
While Aurora Cannabis missed analysts’ estimates, it still churned out revenue growth of 289% last quarter. That said, most of these names — ACB included — do not generate profits and do not have the strongest financials. Thus, we need the technicals to behave better to justify a long position.
For now, I’d wait before establishing a position in ACB stock. Long-term investors may opt to accumulate the stock, but I would rather wait until the stock looks healthier. One alternative would be a position in Constellation Brands (NYSE:STZ), which owns 40% of CGC, but has strong fundamentals and a good-looking chart to boot.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no position in any aforementioned securities.
