Decriminalization Won’t Pass the Senate, and Cronos Will Come Back Down

CRON has been weak all year

This morning, I am recommending a bearish trade on Cronos Group, Inc. (NASDAQ:CRON), the vertically integrated cannabis company.

Despite the major indices hitting a series of new all-time highs earlier this week, my indicators are giving bearish readings — pretty strong ones — for the second week in a row.

The S&P 500 has ended lower for three consecutive sessions, yet it is only off of its recent high by less than 1%. So far, it has been able to hold above very short-term support near the 3,100 level.

With futures pointing higher this morning, it’s possible that we’ve seen the entirety of the pullback I’ve been expecting for a few weeks now.

But I think it’s more likely that the index may consolidate at current levels for a bit before pulling back further to the 3,000 level.

Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView

As you can see in the chart above, if short-term support at 3,100 fails to hold, a drop to the July and September peaks becomes more likely. The rising 50-day moving average (red line) at 3,015 should also provide support on a pullback.

Now, this wouldn’t be the end of the bull market. In fact, such a pullback would only amount to a drop of about 2.5%. I think that would be a healthy development that could allow the bulls to “pause and refresh” before heading higher again.

Keeping that possibility in mind, I don’t want to recommend a bullish trade, and I am turning to CRON because of some misplaced optimism in the cannabis sector.

One Step Closer to Legalization?

A U.S. congressional committee passed legislation to decriminalize cannabis, and cannabis stocks soared. Decriminalization on the federal level would be undeniably beneficial for the industry, but traders and investors should temper their enthusiasm.

The U.S. House of Representatives is controlled by the Democratic Party, which means this legislation could make it to the Senate. But that is the primary roadblock. The Senate is still controlled by Republicans, and the GOP is unlikely to approve decriminalization measures.

CRON is a great way to play this situation because it has generally performed poorly in 2019.

Falling Since February

CRON has continuously posted earnings losses, even when it beats expectations, and its poor performance has hurt its share prices. Since reaching its 52-week high of $25.10 in February of this year, it has dropped by nearly 70%.

Daily Chart of Cronos Group, Inc. (CRON) — Chart Source: TradingView

CRON bounced off support at the $6.00 level, and it started to head higher on the positive news from Congress. But realistically, that optimism will fade once traders remember who controls the Senate. Even if that isn’t enough to push the stock lower, a broader pullback on the market might be.

Buy to open the Cronos Group Inc. (CRON) Jan. 17th (2020) $7.50 Puts (CRON200117P00007500) at $0.93 or lower.

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