Akerna (NASDAQ:KERN) is the the latest Cannabis company to go public. It just made its debut on the Nasdaq Composite about a month ago. If you haven’t heard about it yet, you will soon. That’s because there is a very valuable lesson to be learned from KERN.
I think a great way to invest in the cannabis markets is through the ancillary companies. It’s what I call the Levi Strauss (NYSE:LEVI) model. Mr. Strauss was an unsuccessful Gold Miner who realized that it is better to sell things, like jeans, to miners than to be a miner. Very few miners were successful, but regardless of whether a miner had found gold, they still needed to buy things like picks, shovels and jeans. The idea was to not be a miner. It is to be the person who sells things to the miners.
KERN is an ancillary company to the cannabis industry. It makes compliance software, and whether a cannabis company is successful or not, they will still need this type of software.
Because it is such a newly publicly traded company, I have not yet had sufficient time to study the fundamentals and am not ready to make an informed opinion on KERN’s future prospects. But as a veteran trader, I saw an obvious lesson and that is what I wanted to talk about.
The lesson is in the reversal day that recently occurred.
In markets, prices are always doing three things: They are going up, going down or staying the same. When prices are rising, the forces of demand are in control. If prices are going lower, the forces of supply are in control. When markets are trading sideways or are flat, the forces of supply and demand are equalized.
A reversal day or reversal pattern illustrates the changing of leadership. In the case of KERN, we had a classic reversal day on June 20. The stock has lost about 50% of its value since then.
Understanding the KERN Stock Charts
The first chart is KERN on June 20. In the morning, the forces of supply were clearly in control. The stock opened $10 higher than the previous day’s close and by noon it was trading above $70. Then around 1:30 p.m., the demand dried up, and the forces of supply took over. They drove the stock price back down below where it opened and it closed near the lows of the day.
It also closed below the previous day’s closing price. This is an important part of a reversal day because it shows that the trend is changing. If it had closed above the previous close, then it would still be in an uptrend.
Next, we have a one month chart of KERN stock for a broader perspective. I like to use candlesticks on my charts because I think it is easier to see patterns like we have here.
Each day is considered a candle. If the stock closes above the opening price it is blue. The bottom of the candle is the opening price and the top of the candle is the close. If the stock closes below the opening price, it is red with the top being the opening price and the bottom of the candle the close.
The highs and lows of the day, as opposed to the open and close, are shown by the little lines that are above and below the candles which are known as “wicks.”
With some practice, different types of patterns can be easily recognized. There are numerous candle stick patterns and formations that have names. The two-day pattern that formed over June 19 and 20 is called a “Dark Cloud Cover”. This is considered a bearish reversal pattern. It certainly was in this case.
It really isn’t important to know what these names are. What is important is to be able to understand what they are illustrating. In this case, we can see that in the week leading up to June 20, the buyers were in control. On each day, the closing price was higher than the opening price. Then, on June 20, the buyers ran out of steam. Around midday, the sellers took over and have been driving KERN lower since.
Being able to recognize reversal patterns is not difficult if you understand the dynamics that are being illustrated. The recent action in KERN stock can teach you a valuable lesson.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.