While Aurora Cannabis (NYSE:ACB) stock has shed most of its gains from October, it still isn’t necessarily cheap. The company still loses money, while its stock still sells at a premium (almost 15 times its sales).
From a froth perspective, it still has more to shed, but it could still be a bargain for some investors.
Consider the following points about Aurora stock:
- After rallying more than 400% over the past two years, Aurora stock is back to its 2017 levels and 80% off its highs.
- Although cannabis stocks are still exciting to investors, they’re struggling to gain traction now. Aurora has fresh trading opportunities.
- The industry is supported by a viable long-term thesis, but it still has many hurdles to overcome, especially in terms of regulations.
- ACB stock is trying to make a comeback after a hideous November showing.
Many pot stocks, not just ACB, collapsed in November, and all upside trading setups that were available in early November have since failed. Now, ACB stock and others are trying to make a comeback, but first they must stabilize.
In early November, I wrote about the trading opportunities for ACB and both the bull and bear outcomes materialized. First, the stock popped close to its upside target only to collapse down and set a new low. Pot stocks tried hard to set a bottom, but then a trap door opened up beneath all of them.
Aurora stock fell 40%, almost to $2 per share. It wasn’t alone, others like Canopy Growth (NYSE:CGC) fell 30% to below $14 per share.
Those bottoms were clear opportunities for bullish trades because pot stocks fell into pivot points that date back to 2016. Aurora Cannabis stock fell into the neckline from which it broke out in October 2017. A year earlier, it was a major failure point. Such sharp pivot zones are typically very contentious so it was fair to anticipate a bounce off last month’s flash crash. Indeed it came off a Nov. 19 bounce that was a pure technical bet and independent of the fundamental prospects of ACB (I shared a video detailing this technical setup before it happened).
A New Opportunity in Aurora Stock
Now Aurora stock has given most of that rally back, so the same setup is back on the table. This time, it’s not so obvious since it also presents an opportunity for the bears.
For about a week, the stock has been trading inside a tight range. This raises the odds of a breakout. The direction of the move is yet to be decided, but there are trigger lines to watch. If ACB bulls can exceed $2.60 per share, they can rally another 20% from there with resistance at $2.80. Conversely, if the bears can break below $2.35 per share, they can restart a selloff even lower than the November low.
Anything below $2.30 per share is proven support from a short-term trading perspective.
But What About ACB Stock’s Fundamentals?
Today’s discussion is purely a trade opportunity for either side of the fence. This is independent of the cannabis stock opportunity for the long term.
Aurora and its competitors are intrepid companies that are blazing a tough trail. In fact, cannabis is still illegal in the U.S. Some states have embraced it, but the cannabis companies have high hurdles to overcome in every aspect of their business. This makes the bullish thesis very difficult.
But pot stock fans are very dedicated to their stocks. The future uses for cannabis is broad, so it’s hard to argue against the sector’s long-term viability. But it still is equally as hard to justify the value argument of a stock like Aurora Cannabis. Even after this huge correction they are still bloated by traditional metrics. Nevertheless, there is nothing normal about the pot stock sector so for now the fans can ignore the metrics.
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.
