In an interesting turn of events, cannabis stocks have been surging back from the dead. Among those rallying higher, Aurora Cannabis (NYSE:ACB) has enjoyed healthy gains lately. Despite rallying 18.2% on Nov. 21 and more than 45% from its low earlier that week, ACB stock still has a lot of overhead resistance.
With the ACB stock price recently closing at $2.52, or down over 22% from the Nov. 21 high, you can appreciate how strong that resistance is.
Setting that aside, if you were to give most stocks a 45% rally in three days — even from its 52-week lows — they would likely be in a pretty good technical position. The fact that ACB stock is not tells us how bad of a situation it’s really in.
It’s incredible how fast this stock — and many of its peers — went from the high single digits and teens to sub-$5. Many investors won’t invest in stocks trading for less than $5, let alone sub-$3.
Is Aurora Cannabis stock different though?
Breaking Down Aurora Cannabis Stock
The other day, I outlined why Tilray (NASDAQ:TLRY) stock is not one I would buy, despite the cannabis rally. Simply put, the stock does not have a strong enough balance sheet. Particularly when it’s compared to other stocks, like Canopy Growth (NYSE:CGC) or Aphria (NYSE:APHA).
Like CGC and APHA, I would also consider Cronos (NASDAQ:CRON) and ACB stock to be more attractive than Tilray. But there’s one thing all of these names have in common and that’s the valuation. Put another way, you can go ahead and throw valuation out the window when it comes to pot stocks.
These companies garner billion-dollar valuations, with just tens of millions in sales, negative free cash flow and little or no profitability. ACB stock is not an exception to this observation.
Instead, this group has achieved such lofty valuations due to high growth rates, a potentially large total addressable market (TAM) and big investments from larger companies. Specifically, Constellation Brands (NYSE:STZ) invested some $4 billion in CGC, while Cronos received a $1.8 billion investment from Altria (NYSE:MO).
When sentiment is poor, the stock performance is poor and vice versa. The mood is shifting in bulls’ favor but is far from euphoric at the moment. Let’s see if these stocks can take a break, avoid making new lows, and then resume higher.
Since the financials and valuations aren’t catalysts for bulls to rally on, they need outside catalysts to do the heavy lifting. That is, regulatory achievements and positive news need to continue in order for these stocks to remain in demand.
Trading ACB Stock
If the chart shows investors anything, it’s that risk/reward is an important measure. When support gave way and violated the long setup, bulls who stepped aside avoided a big haircut. Now, the setup in Aurora Cannabis stock is not exactly easy, but it is rather simple.
Aurora stock has two tasks at this time. One of those tasks is a reiteration of what we said in the previous section, which is that it must avoid closing at new lows. That would be a break of $2.14 (blue line on the chart above). A close below this mark signals that the technicals remain intensely stressed.
The other task? Closing over the $3.50 mark. Just as it’s key for bulls to keep ACB stock north of $2.14, it will be important for them to reclaim the $3.50 mark. This area was key support in October and early November before the floor gave way and shares plunged more than 20% in just a few days.
Further observations include the 20-day moving average, which acted as resistance on ACB stock’s latest rally. Therefore, reclaiming the 20-day moving average will be important too.
The bottom line? Just because ACB stock put together a strong rally doesn’t mean it’s a must-buy stock at this moment. There are plenty of overhead resistance and downtrend resistance marks in the way. As of now, the charts are starting to improve, but still need to prove that the stock deserves investors’ trust. That starts with reclaiming the 20-day moving average, then the $3.50 level.