[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.]
I heard someone say recently that technical analysis of marijuana stocks is like reading tea leaves. It is unfortunate that technical analysis has such a bad reputation, but I can totally understand why it does.
The vast majority of technical analysts that I see seem to look at charts and mindlessly identify patterns without understanding what they are supposed to mean. Even worse, some analysts are proponents of bizarre methods like Elliot Waves and Gann theory. These techniques are like the Loch Ness Sea Monster, Bigfoot and UFOs. They may be fun to talk about, but they are not real.
In financial markets, there are certain levels that are more important than others with regards to the amount of supply and demand that exists at them. In addition, in financial markets prices are always doing one of three things. They are either going up, going down, or staying the same. When understood and applied correctly, technical analysis should be an illustration of these dynamics.
Knowing where the important levels and trends are can help you profit. For example, suppose you want to buy a stock if it drops to $20. If there is support at the $21 level, the stock may never get to $20. It may get to $21 and rally. You would have missed out on a large profit because you didn’t understand that the market dynamics made the stock getting to $20 unlikely.
Marijuana Stocks: Aurora Cannabis (ACB)
Aurora Cannabis (NYSE:ACB) is a Canadian-based company that grows are sells medical marijuana, indoor cultivation systems and hemp-related food products.
ACB stock has been in a small downtrend since running into resistance at the $7 level. I would expect this level to continue to be resistance in the short term.
There is resistance at the $7 level because it was a support level in February, May, and June. How does this happen? How does a support level become a resistance level? Few people consider this but I think that it is an amazing phenomenon. It is really a picture of mass psychology.
Those who bought ACB at $7 were feeling pretty good when it went higher. But then when the stock broke that level, they were looking at a loss. They tell themselves that if it rallies back to $7 they will sell it and get out so they can break even.
They shorts are happy that the stock went lower because they are looking at a profit. They tell themselves that if the stock gets back to $7, they will short more and add to their positions. Added to this are professional traders seeking to profit off of a clear level.
You can see that there are now three different groups that are interested in selling stock at the $7 level. This supply creates resistance.
Aphria (NYSE:APHA) grows and sells cannabis.
About a month ago, I pointed out that if the $6.30 level broke, this stock would probably trend lower. After the company reported earnings and rebounded, someone sent me a nasty email telling me I have no clue about Aphria.
I must admit, I had to laugh. The stock lost 20% of its value in the two weeks after I talked about it. If this person could identify stocks that were about to move by 20% in two weeks I would most certainly subscribe to his or her newsletter. If I had a short position, I would have covered it the day before the earnings release. I never hold short positions going into an earnings releases because it is too risky.
After the rally, APHA stock hit resistance at the $7.50 level. This level was also resistance in May and June. It will probably continue to be so in the near-term.
There is support at the $6.30 level. This level was support from May through July. It will probably continue to be support in the near-term.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) grows and sell marijuana.
You don’t need to be a Market Guru to see that the $14 level is important for CRON stock. It was resistance in September and December of 2018. Then it became support from May through July before breaking and becoming resistance again over the past month.
How does a resistance level become a support level? Those who sold it at the level believe that they have made a mistake when the stock trades higher. They tell themselves that if it falls back to the level, they will buy it back. This demand for stock at the level is what creates support.
On Aug. 8, Cronos reported earnings, and the action in the stock was very weak. It opened around $15.50, which was the day’s high. It sold off over the course of the day and closed near its lows. This is probably a bearish dynamic and it could be the start of a new downtrend.
Canopy Growth (CGC)
Canopy Growth (NYSE:CGC) grows and sells marijuana.
CGC stock may have broken its recent downtrend. This means that the forces of demand may be equalizing with or about to overcome the forces of supply.
In financial markets, prices are always doing one of three things. They either are rising, falling or staying the same. When prices are going up the forces of demand are in control of the market. When prices are falling the forces of supply are in control. When prices are staying the same the forces are equal.
The break of a properly drawn trendline means that the leadership may be about to change. It takes some practice, but if you understand what trendlines illustrate you can profit.
CGC has broken the downtrend that began in July. This could be a sign that it may rally as the demand forces take over. At the very least, it is an indication that it has stopped declining.
Hexo (NYSE:HEXO) grows and sells medical marijuana.
From April through August, HEXO stock lost about 50% of its value. Then it became oversold and found support at the $4 level. It has recovered nicely since then. The most recent close was $4.94.
This stock illustrates an important dynamic about trading. When markets get to important support and are oversold, they tend to rebound and rally. This was the case here.
When they get to important support and are not oversold they tend to spend time consolidating before breaking the level and trending lower.
What does oversold mean? It is a measurement of momentum. It is where the current price is versus where it was X many days ago. When it reaches extreme readings to the downside it is considered oversold.
That was the case here. HEXO was extremely oversold when it reached the $4 level in July.
KushCo Holdings (KSHB)
KushCo Holdings (OTCMKTS:KSHB) produces and sells packaging materials for companies in the cannabis industry.
KSHB stock is testing support around the $4.30 level. This level was support in June and again in late July. On each occasion a large rally followed.
If you are tempted to buy this stock, you may want to wait to see if the level holds. A potential strategy is to wait until the downtrend line breaks before buying it. This could be a signal that the forces of demand are about to equalize with or overcome the forces of supply.
While you won’t get the exact low price, this will decrease the chances of buying it and getting run over if the stock continues to trend lower.
Scotts Miracle-Gro (SMG)
Among other things, Scotts Miracle-Gro (NYSE:SMG) manufactures and sells equipment and accessories for hydroponic growing.
Over the past two weeks, SMG has been testing resistance around the $110 level. There is resistance around these levels because it is where the top was in late December 2017 and January of 2018.
This is a good example of how markets have memories. Certain levels can be important for years, and sometimes even decades.
After failing at the resistance, the stock traded all the way down to $57 in December of 2018 before recovering and rallying all the way back to current levels.
If you are bearish on the long-term prospects of this company and are considering selling SMG stock, this would be a logical place to do so.
At the time of this writing Mark Putrino did not hold any positions in any of the aforementioned securities.