How to Trade the Sundial Growers Dip

After months of plumbing the depths, marijuana stocks are finally waking up. And it’s not just the big names like Canopy Growth (NYSE:CGC) or Tilray (NASDAQ:TLRY) that are leaping higher. The sentiment shift extends across the industry to the low-dollar little guys like Sundial Growers (NASDAQ:SNDL). In just six trading sessions, SNDL stock doubled from under 75 cents to nearly $1.50.

Image of marijuana being weighed on a scale
Source: Shutterstock

The eye-popping jump isn’t uncommon for the stock, though. Due to its ultra-cheap price tag and speculative nature, volatility sparks every time traders push into marijuana stocks.

If you think doubling in six days is inspiring, take a look at what happened in February. Prices rocketed from 50 cents to $4 in 12 trading sessions for a gain of 700%. Needless to say, Sundial Growers’ history of quick massive gains makes it a favorite among speculators and momentum traders looking for a high octane play.

Volatility Sticks With SNDL Stock

That’s the carrot.

Now here’s the stick.

Every surge was transitory. Rather than kickstarting a new trend or multi-month advance, each price spike fizzled as fast as it came.

Buying SNDL stock as an investment has been torture. Until its underlying fundamentals improve, it will remain a highly speculative vehicle to be sold relatively quickly after it is bought. To wit: since peaking on June 3, prices have already retreated 30%. Those who didn’t sell into the strength have seen their profits dwindle.

Sundial Growers Stock Price Chart

Sundial Growers (SNDL) chart with potential trend reversal
Source: The thinkorswim® platform from TD Ameritrade

Another drawback to buying SNDL stock is that there are long periods between each episode of glory. If you’re unlucky enough to buy shares when pot stocks are falling out of favor, then you might have to wait months until another spike arrives to erase your losses. I consider that a bit too psychologically demanding for my taste.

That said, the whole reason we’re discussing Sundial Growers is that marijuana stocks have come into favor of late. Sure, we’re in the middle of a weeklong retreat, but it came after a price rally to new multi-month highs.

The million-dollar question is whether or not we’re at the beginning phase of a new uptrend or whether the recent jump was a one-off.

SNDL Stock and Sector Posture

To help answer the question, let’s use the Alternative Harvest ETF (NYSE:MJ) as a proxy for cannabis stocks.

I do view the current rally as different than its many predecessors. It’s both lasted longer and taken out the 50-day moving average. Additionally, we broke through multiple resistance zones. So, I’m willing to give buyers the benefit of the doubt.

But Thursday’s weakness is providing a test. This dip must get bought to keep the bulls’ dreams alive.

Alternative Harvest ETF (MJ) with looming support test
Source: The thinkorswim® platform from TD Ameritrade

If MJ falls below the low of its recent base (which corresponds with the 20-day moving average), then my optimism will cool. Honestly, it will make the pattern messier than it needed to be and signal the environment is too sloppy to play in.

With SNDL stock, there is some support looming close at $1. The best-case scenario is to see a reversal candle form in that area, followed by a break of the previous day’s high to signal the next upswing is beginning. I would use that as your trigger if you’re going to buy. Today’s high is $1.15, but I suspect we’ll get another candle or two with lower highs that you can use.

On the date of publication, Tyler Craig held LONG positions in MJ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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