Technical analysis has a bad reputation. This isn’t surprising because most of the technical analysis of marijuana stocks that I see is not very good. Some is downright terrible.
Even worse, some analysts are proponents of bizarre techniques like Gann Theory or Elliot Waves. These methods are like the Loch Ness Monster or UFOs. They may be fun to talk about, but they are not real.
What is real is the fact that in financial markets, certain levels are more important than others. These levels have more supply and demand at them. In addition, in financial markets prices are always doing one of three things — going up, going down or staying the same. When understood and applied correctly, technical analysis should help you identify these levels and trends. This can lead to low-risk trading ideas.
After becoming the most oversold that they have ever been two weeks ago, many of the larger cannabis stocks have broken their downtrends and have been consolidating or trading sideways. It is too soon to tell whether or not they will turn around, but we have not seen the capitulation volumes that come with significant bottoms. This means there is a chance that they could start to trend lower again.
Aphria (NYSE:APHA) manufactures and sells medical cannabis in Canada and internationally. It currently has a market cap of about $1.3 billion.
APHA stock went into a free-fall after it broke support around the $6 level. This level was the low in mid- and late August.
After becoming oversold, it found some support around the $5 level. There is support at this level because it is where the low was in early August. It has now broken its downtrend and is consolidating above $5.
The term oversold refers to momentum. Momentum is a measure of where the stock is now versus where it was X many days ago. If the average of this measurement gets to an extreme on the downside, it would be considered to be oversold.
This action illustrates an important dynamic about markets. When they are oversold and get to important support, they tend to rebound. When they get to important support and are not oversold, they tend to break the level.
Aurora Cannabis (NYSE:ACB) is a Canadian-based company that grows and sells medical marijuana, indoor cultivation systems and hemp-related food products.
ACB stock was in a freefall, but after becoming oversold it has broken its downtrend and is consolidating.
It found support right at the $4 level. This illustrates how nice, round levels are important psychologically. There is really no logical reason for doing so, but investors like to place their buy and sell orders at numbers like $10 or $20.
If ACB turns around and rallies, there is a good chance that it will hit resistance around the $5.50 level. This is because it was a support level in August in addition to being important psychologically.
Few investors think about this, but why would a level that was support become resistance? Consider the following. Those investors who bought the stock at the support level are losing money once it goes lower. They do not want to sell it for a loss, so they tell themselves that if it rallies back up to tbreakeven, they will sell it to get out at breakeven. The large amount of sell orders for supply of the stock at that level creates resistance.
Canopy Growth Corp (NYSE:CGC) produces, distributes and sells cannabis in Canada. It has a market cap of $7.9 billion.
CGC stock has broken support around the $23 level. There was support at this level because it is where the recent lows were in late August and early September. It has now become a resistance level.
This is an illustration of how levels that were support become resistance. Investors who bought it at the level are losing money when the support breaks and the stock goes lower. They don’t want to take a loss and decide that if it rallies back to the level they will get out of it at breakeven.
In addition to this, the short-sellers are making money when the stock goes lower. They believe they made the correct decision and tell themselves that if the stock rallies back, they will short more and add to their positions.
Added to this are professional traders seeking to profit off of a clearly defined level, and you can see that there are three groups of investors who want to sell stock at the level. This supply of stock is what creates resistance.
Cronos Group (NASDAQ:CRON) produces and sells cannabis in Canada and Germany. Its current market cap is about $2.7 billion.
CRON stock recently broke its downtrend line and has been consolidating. If you want to be successful, you need to understand the concept of trends.
When markets are going higher, the forces of demand are in control of the market. When they are headed lower, the forces of supply are in control. When prices aren’t moving or are trading sideways, the forces of supply and demand are roughly equal.
The break of a trendline can illustrate that the leadership of the market is changing or at the very least equalizing. In the case here, the break of the blue downtrend line shows that the forces of demand have for the time being, become equal with the forces of supply.
Of course, drawing trendlines is an art and not a science. But with some practice and an understanding of just what it is that they are supposed to show, they can help you make investment decisions.
Hexo (NYSE:HEXO) produces, markets and sells cannabis. The current market cap is about $945 million, according to Zacks.
HEXO stock may be breaking support around the $3.90 level. This level was support at the end of July, the end of August, and then again over the past two weeks. It will probably become a resistance level if it breaks.
This chart illustrates how market bottoms are typically more volatile than market tops. This is due to human emotions. Stocks are bought due to hope. Stocks are sold due to fear. Fear is a much more powerful emotion than hope.
When markets are forming bottoms, like they did in July, August, and now, sellers are afraid that the stock will continue to drop. Because of this, they sell aggressively without caring too much about the price. This dynamic is what creates the volatility.
Medicine Man Technologies (OTCMKTS:MDCL) provides cultivation consulting services to cannabis growers. The current market cap is about $130 million. MDCL failed at resistance after becoming overbought and is now trending lower.
The levels around $3.90 were the top in April, and then again in May and June. This is the reason why there is resistance at this level.
Overbought refers to the momentum of the stock. Momentum is where the price is today versus where it was X many days ago. When this number reaches an extreme to the upside, it is considered to be overbought.
This is an important dynamic to understand about markets. When markets are overbought and get to important resistance, they tend to selloff, as is the case here.
When markets are not oversold or overbought and get to important support or resistance levels, they tend to consolidate before resuming the trend.
Tilray (NASDAQ:TLRY) engages in the research, cultivation, processing and sale of cannabis. Its current market capitalization is $2.8 billion.
TLRY stock broke support around the $25 level. There was support at this level because it is where the recent low was in early September. It has become a resistance level.
The recent downtrend has been broken and the stock is trading sideways.
Longer-term, if the TLRY continues to drop there will probably be some meaningful support around the $22 level. This is because this is where the stock hit the market last summer when it went public.
This is because various stake holders, such as investment bankers who brought the company public, early investors, and the management do not want it to break that level. This may cause them to become buyers which would create support.
Last week, cannabis stocks and other equities became the most oversold that they have ever been. This means that the stocks are trading at levels that are significantly below their recent averages. Typically, when stocks are this oversold they then to rally.
However, there is an interesting dynamic occurring here. Usually when stocks or sectors are this oversold, they are capitulating.
Capitulation mean that the sellers want to aggressively sell their stock. They do not care about the price. They just want to get out of the position because they are are tired of watching the price drop. These dynamics usually cause large amounts of volume to trade while the stock makes a large move lower.
In the situation here, despite being historically oversold, there has not been a significant increase in the average trading volume. This could be an indication that the sector is not yet ready to turn around and it will continue to trend lower after the current consolidation that is occurring.
If you follow cannabis stocks, you are probably familiar with the CannTrust (NYSE:CTST) story. If you aren’t, you should be, because I think we will soon be hearing about similar situations at other cannabis companies.
CannTrust once had a market cap of more than $1 billion and was considered an industry leader. Then it got caught growing cannabis in unlicensed grow rooms after a disgruntled ex-employee tipped of the authorities. And as is typically the case nowadays, the management of the company discussed their illegal activities in detailed emails that the have been seized.
This led to the CEO being fired, the president resigning and the stock crashing.
Now it turns out that CannTrust was also using illegal seeds to grow in legal grow rooms. This resulted in illegal cannabis being sold in the legal markets — though a CannTrust spokesperson disputed the latter part.
It should come as no surprise that Health Canada has suspended its license. The company will also have to buy back and probably destroy the cannabis that it has sold, among other steps. I am not so sure that CannTrust, now better known as “Can’t Trust,” will be around for much longer.
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