[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.]
In financial markets there are certain levels that are more important than others with regards to the amount of supply and demand that exists. Additionally, 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 of marijuana stocks should help you identify these levels and trends. This can lead to low-risk trading ideas.
Cannabis equities are at a very important inflection point. We could be getting close to a complete capitulation or meltdown in the sector, which is very oversold. In fact, it is as oversold as it has ever been. However the volume increase that typically comes with a capitulation has not occurred yet. This means the selloff could continue.
Tilray (NASDAQ:TLRY), Aphria (NYSE:APHA), Canopy Growth (NYSE:CGC) and Hexo (NYSE:HEXO) are testing and possibly breaking important support. Aurora (NYSE:ACB) and Cronos (NASDAQ:TLRY) have already broken important support. Medicine Man (OTCMKTS:MDCL) failed at important resistance. This is all in spite of the fact that in the past month, there have been two stories that should be extremely bullish for the sector.
The first is that the Department of Justice (DOJ) has started accepting applications for institutions to grow cannabis for research purposes. The second is that the House of Representatives just passed the SAFE Act. This act is a step forward in letting cannabis businesses have access to traditional banking services. When stocks act poorly despite good news coming out, it is typically a bearish indication.
Aphria (NYSE:APHA) manufactures and sells medical cannabis in Canada and internationally. It currently has a market cap of about $1.5 billion.
APHA stock has been in a free-fall since breaking support around the $6 level last week. This level was the low in August.
As expected it found some support around the $5.20 level. There is support at this level because it is where the low was in early August. If it breaks there is a good chance that it becomes a resistance level.
The stock is currently oversold so there is a good chance that it has some kind of rebound or rally. The term “oversold” refers to momentum. Momentum is a measure of where the stock is now versus where it was X many days ago. If the average of this measurement gets to an extreme on the downside it would considered oversold.
For example, statistics tell us that 95% of all trading should be within two standard deviations of the mean. If a stock is more than two standard deviations below the mean, it would be considered to be oversold. Traders would be looking for a rebound.
Aurora Cannabis (ACB)
Aurora Cannabis (NYSE:ACB) is a Canadian-based company that grows and sells medical marijuana, indoor cultivation systems, and hemp-related food products.
After a weak earnings report and some analyst downgrades, ACB stock has been in a free-fall over the past three weeks.
The stock has now broken important support around the $5 level. There was support at this level because it is where the lows were at the end of last year. It is also an important level psychologically. People like to buy and sell stocks at nice round levels. It will now probably become a resistance level.
The downtrend may continue because there is no clear support until a level around $4, which is 10% below current levels.
ACB stock is oversold so there is a good chance that it has a relief rally soon. The last three times that it was this oversold a rally followed.
Canopy Growth (CGC)
Canopy Growth (NYSE:CGC) produces, distributes, and sells cannabis in Canada. It has a market cap of $8.7 billion.
CGC stock may have broken support around the $23 level. There has been support at this level because it is where the recent lows were in late August and early September. It is now at a resistance level.
Levels that were support in the past tend to become support again because those who wanted to buy the stock at the level and didn’t vow to themselves that if it drops back to the level, they won’t miss it. This time they will buy it.
Those who shorted it at the level are looking at a loss when it rallies and goes higher. They tell themselves that if it comes back to the level then they will cover and close out the position at break-even. This demand for the stock is what creates support at the level.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) produces and sells cannabis in Canada and Germany. Its current market cap is about $3.5 billion.
CRON stock recently broke support around the $10.75 level and has dropped by over 15% since then. The $10.75 level was the bottom of the range for over a month, and it will probably become a resistance level if the stock rallies. This move puts CRON back into a continuation of a longer-term downtrend that began in late March when it was trading around $24 a share. Since then the price has dropped by over 50%.
The price may continue to drop. I do not see any clear support near current levels.
Cronos continues to be hurt by its lack of leadership. The current CEO is only temporary and the Board of Directors has not yet selected a new person to run the company.
HEXO (NYSE:HEXO) produces, markets, and sells cannabis. The current market cap is about $985 million.
HEXO stock may have broken support around the $3.90 level. This level was support at the end of July, the end of August, and then again over the past two weeks. It will probably become a resistance level. Levels that were support tend to become resistance once they are broken.
Longer-term, if it does rally there will probably be resistance again around the $4.75 level. This is because it was resistance in mid-August and mid-September. Levels that were at resistance tend to meet resistance again. This is because the investors who wanted to sell at the resistance level and missed it tell themselves that if the stock rallies back to the level, they won’t hesitate this time and place their orders.
The short-sellers believe that they made the correct decision to short when the stock goes lower. They tell themselves that if the stock rallied back to the level, they will add to their positions and short more. This abundance of sell orders at the level is what creates resistance.
Medicine Man Technologies (MDCL)
Medicine Man Technologies (OTCMKTS:MDCL) provides cultivation consulting services to cannabis growers. The current market cap is about $133 million.
MDCL failed at resistance after becoming overbought and is now trending lower.
The levels around $3.90 were the top in April, and then again in May and June. This is the reason why there is resistance at this level.
This is an important dynamic to understand about markets. When they are oversold and get to support, they tend to rebound. When markets are overbought and get to resistance they tend to selloff, as is the case here.
When markets are not oversold or overbought get to important support or resistance levels, they tend to consolidate before resuming the trend.
Tilray (NASDAQ:TLRY) engages in the research, cultivation, processing and sale of cannabis. Its current market capitalization is $2.6 billion.
TLRY stock seems to be breaking support around the $25 level. There is support at this level because it is where the recent low was in early September. If this level does break it will probably become a resistance level.
Support levels tend to become resistance levels because when the level breaks and the stock trades lower, the investors who bought it at the level are now losing money. They tell themselves that if the stock rallies back to the level they will sell it to get out without losing money. They place their sell orders at the level, and this supply of stock is what creates the resistance.
Longer-term, if the stock continues to drop there will probably be some meaningful support around the $22 level. This is because this is where the stock hit the market last summer when it went public.
Cannabis Sector Momentum
Cannabis equities are more oversold than they have ever been. This means that the stocks are trading at levels that are significantly below their recent averages. Typically, when stocks are this oversold they then lead to a rally.
However, there is an interesting dynamic occurring here. Usually when stocks or sectors are this oversold they are capitulating.
Capitulation mean that the sellers want to aggressively sell their stock. They do not care about the price. They just want to get out of the position because there are tired of watching the price drop. These dynamics usually cause large amounts of volume to trade.
In the situation here, despite being historically oversold, there has not been a significant increase in the average trading volume. This could be an indication that the sector is not yet ready to turn around and it will continue to trend lower.
At the time of this writing Mark Putrino did not have any positions in the aforementioned securities.