Back at the beginning of June, right after New Age Beverages (NASDAQ:NBEV) shares suffered a key technical breakdown, I suggested that NBEV stock was likely to fall much farther. Without its most important support levels in place, there was nothing to stave off the selling pressure that had been established.
A small but raucous-and-vocal crowd protested, of course. A wide swath of investors had become enamored with anything cannabis-related several months before and was now working to keep their trades from losing even more ground.
New Age Beverages stock is now down 40% since my June 4 warning. I hope you were listening.
I’m not bringing it up again to gloat, though. I’m analyzing, in a level-headed manner, a movement that lured too many investors into making a critical mistake that could have been avoided. Two misunderstandings stand out above the rest.
Some investors couldn’t care less about a stock’s chart, believing there’s nothing about price history that indicates where a stock is likely to travel. Other investors only care about the chart, convinced that analyzing companies’ fundamentals is pointless.
Both camps are half-right and half-wrong. Charts matter, but only as confirmation of companies’ underlying fundamentals. And vice versa.
An important middle ground between those two camps is the changing perception of companies and their profit prospects. Back in June, the headlines and mood surrounding NBEV were taking a turn for the worst.
That’s why the tumble NBEV stock took below the 200-day moving average line — plotted in white on the chart below — was such a red flag. The red arrow marks the day I posted the warning.
There was also something suspect about the fact that the $5.04 level, plotted as a yellow dashed line, suddenly stopped acting as support.
The rest, as they say, is history.
In short, given the situation at the time, the break of NBEV stock under the 200-day moving average line was an important warning.
The Slump Wasn’t Unique to New Age Beverages Stock
The other red flag was the fact that the breakdown and the weakness leading up to the collapse wasn’t unique to New Age Beverages stock. Most marijuana stocks were falling at the time. When an entire sector is moving lower, more often than not it’s a sign of some major, underlying philosophical problems that can take weeks or even months to sort out.
The graphic below is often used to point out the problems faced by marijuana stocks in recent weeks. None, including, of course, NBEV stock, was immune to the weakness. Indeed, by that time, even the marijuana movement’s key names like Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON) were all also losing ground.
Once the crowd starts to move, every participant is forced to go along. It’s also tough to stop a crowd once it gets moving. Most of the time it simply has to run out of energy.
Looking Ahead for NBEV Stock
The good news for those traders who stuck with their stakes all the way down to its current level is we may be more than halfway to a major low. The bad news is we don’t seem to be quite there yet. But the chart of NBEV stock will indicate when a rebound is materializing.
On the daily chart above, the blue line, which depicts the 20-day moving average, ended a recovery effort a couple of different times in August. The stock finally managed to work its way above the 20-day line in September, but a decline to the purple 50-day moving average line only had to be kissed to put shares back into a downtrend. But we’re starting to see the bulls hold the line on NBEV stock.
A move above the 50-day moving average line, therefore, is the key.
That being said, I would caution against expecting any rebound to carry New Age Beverages stock as quickly and as far as it was able to travel over the course of the past couple of years.
We’re coming up to the one-year anniversary of Canada’s legalization of recreational marijuana, and cannabis/CBD sales in the U.S. aren’t jumping tremendously. Investors are also more than aware that simply being “in the cannabis business” is no guarantee of actual profits.
In other words, tread lightly.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.