Sundial Growers (NASDAQ:SNDL) is having a great month as it spiked 175% in mere hours. But it’s not all great news because there is more to the story. I don’t make it a habit to fall in love with stocks, let alone one that has a chart as ugly as this. SNDL stock is 91% below its 2019 all time high. The bulls need to temper their enthusiasm a bit.
My point today is not to be bearish but to point out the obstacles. That’s an important step before betting the farm on an investment. I will come to a conclusion later in the article.
First let’s set the stage for investing in general.
The current state of Wall Street is that it’s a zoo. The kids from Main Street stormed in and they are causing havoc. All the proof we need of this is what went on with the WSB situation. Stocks like GameStop (NYSE:GME) that were dead rallied 2,300% simply because of social media rhetoric wars. The gains had nothing to do with the company prospects. I bet that in the end there will be tremendous damages to the retail investors, not the pros.
Exuberance is at an extreme and all speculative stocks are moving on this.
Next we address the state of the cannabis stocks, not the industry.
Consensus among experts is that Canopy Growth (NYSE:CGC) is the shining bud of the bunch. The whole industry fell off a cliff after the 2018 party ended, and they are now making a comeback. They still have a lot to claw back out of this giant hole. Furthermore, this is where their stocks will face resistance. They run the risk of finding sellers from all those investors still stuck from 2018. They will likely want to get out evenish.
The road for pot stocks has not been easy and I respect what these management teams have done. Let’s not forget that it’s still an illegal business in the eyes of the U.S. government. But that’s the source of most of this recent upside. Investors have been chasing cannabis stocks since Joe Biden started gaining in the polls in October. The thesis there is that his administration will surely legalize pot in the U.S. That indeed is a good reason for it and I’ve written about this catalyst many times.
SNDL Stock Has Issue But Also Potential
If I compare SNDL stock to CGC I’d surmise that there is something wrong with Sundial Growers. It is down 10% in a year versus CGC being up almost 100%. Clearly investors are penalizing it still. Even though my opening remarks were somewhat harsh I am not dissing Sundial’s stock prospects. In my last write up about it, I made the point that the bulls were in charge. The opportunity was for them to maintain the higher low trend so they could tackle the chart hurdles. That happened and as soon as they cleared the resistance near 60 cents, the rally was afoot.
The bad news is that from here the work is no longer easy. The new administration is in so the bulk of the effect of that news catalyst has expired. Also the madness from the WSB situation is abating so there should be no more stock cyclone effects. In addition, if you look left on the chart you can clearly see the potential for resistance. The cluster of price action from last June and March loom like thick muck. The bulls are not likely going to slice right through. Luckily, they will have a great incentive. There is a giant gap in the chart from January of 2020 and that could become a magnet.
But that same gap tells me that SNDL stock already had issues even before the novel coronavirus pandemic. Therefore, I will reiterate my point that onus is still is on management to deliver the goods. They have had challenges in the past and some were intrinsic. Hopefully they’ve worked through them and won’t commit more flubs. Operating a cannabis business is tough enough. They don’t need to add to their own hurdles.
What to Do?
So what do I do with the stock now? I promised you a conclusion and here it is. If I own the shares and I love the company then I should not worry about the short-term action. But in the shorter term, I should wait for a trigger. SNDL stock has important levels that will matter soon. The bulls will need to plow through $1.45 per share so they can ignite another burst.
I suspect that it won’t be easy because that is the tail from the 1/27 mad candle. After that, it’s going to be a slog through for another 25 cents. At that point, the buyers will then be close enough to hunt down that open gap. The bulls may be tired a bit so they could fade into $1 per share. There should be short-term support there.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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