The days of cannabis stocks being all the rage are long gone. Now, spikes in stocks of companies like Aurora Cannabis (NYSE:ACB) have been opportunities to sell. Regardless of the reason why, the appetite for pot stocks is but a fraction of what it used to be on Wall Street. Even the anointed kings of the sector like Canopy Growth (NYSE:CGC) have been clobbered. Once-beloved ACB stock is down 21% year-to-date.
Some of ACB’s pain is self-inflicted, thanks to bad headlines. The rest is probably from expectations coming back to earth from the moon. For a while, ACB stock valuation was astronomical. I’m not saying that it’s cheap now — but it’s definitely more realistic. And it’s not alone, as the whole industry has repriced hopium. Case in point is the high-profile spike in Tilray (NASDAQ:TLRY). In one day it hit $300 per share then crashed 90%.
So is it game over for the sector — and specifically for Aurora Cannabis stock? Not necessarily. However, the bullish thesis for ACB has to be one for the long term. Otherwise it would be merely a short-term trade with specific stops and targets.
Aurora Stock Is Not Doomed Yet
So far the long-term thesis is simple: Buy ACB stock and hold it for years to come. The idea is that this is a very young industry that is still illegal in most of the United States. So it is reasonable to expect the stocks to suffer after the initial honeymoon period. But if the vast scope of applications for cannabis come to fruition, then the upside in the ACB stock price is tremendous.
But this is the bet that investors will have to make. I would consider this a speculative position inside a conservative portfolio that has a medium to low conviction level.
Alternatively, ACB stock has clear short-term levels that active traders can use to profit in the meantime. Recently, ACB set higher-lows off of last week’s bottom. This is encouraging, but it’s also setting the lower-high for weeks. If this continues, the ACB stock price range will shrink into a point somewhere around $4.40 per share. This is where I anticipate the real fight between buyers and sellers will happen.
Use Proper Levels to Trade ACB Stock
If ACB stock bulls can break and close above $4.60 per share, then they could have a base on which they can mount a recovery rally. The upside target would then depend on how hard the bears fight on the numerous resistance levels thereafter. Since this is a falling knife, any short-term trades will have to come with tight stop-loss levels. This varies with personal taste and risk appetite, but it would make sense to use prior pivot levels as trigger points. In this case, ACB stock needs to hold $4.20 to maintain the higher-low trend. Therefore it is reasonable to use that as a stop-loss for anyone attempting to catch this falling knife now.
Traditional wisdom says to invest for the long term. This is very true in this case because these are young companies that are swimming upstream against laws and social difficulties, so setbacks are inevitable. But I am confident that cannabis stock fans are relentless — and they will fight tooth and nail to make this happen.
So anyone who underestimates the long-term potential of this very young industry is making a mistake. Aurora Cannabis simply has to prove to investors that it’s worthy of the potential that could lay ahead. Its execution is very key — and this is probably the biggest question mark that I have for these companies. Caution is more than warranted especially since the general stock markets are in limbo because of geopolitical headlines.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
