7 Marijuana Stocks With Critical Levels to Watch

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[Editor’s note: This story will be updated each week with new stocks and analysis. Please check back often for Mark’s latest take on marijuana stocks.]

Technical Analysis gets bad rap, but I understand why. Most technical analysts don’t have a clue about what it is that they are supposed to do. Most analysts mindlessly look for patterns in the markets without knowing what these patterns may mean. Even worse, analysts talk about things like Elliot Waves, Gann theory and Harmonic Charts. These techniques are like UFOs and Bigfoot – They may be fun to talk about, but they are not real. As someone who traded in the hedge fund world for 20 years, I can tell you unequivocally that professional institutional traders do not pay attention to them (although we do enjoy our conspiracy theories!).

Professional traders pay attention to are supply and demand dynamics. This includes important levels, momentum, and trends. If understood and utilized correctly, technical analysis should simply be an illustration of these dynamics. Understanding which levels are important, whether a trend is changing, and the momentum of a stock allows traders to make intelligent and logical decisions.

This can help you with trade placement. For example, suppose “XYZ” is trading at $12 and you want to buy it if it gets down to $10. If you see that there is significant support at $11, you may want to place your order there because “XYZ” may get to $11 and then rally like you expected. Your order at $10 you would have missed it.

Let’s take a look at some of the dynamics that are occurring in the marijuana stocks. There is a lesson to be learned from each of them.

Marijuana Stocks Reaching Critical Levels: Cronos Group Inc (CRON)

Click to EnlargeCronos Group  (NASDAQ: CRON ) produces and sells cannabis.

CRON has been consolidating around the $15.75 level over the past three weeks. You can see that in early May and early June the stock found support around the $14 level as we predicted. This is because this level was resistance in September and December.

Why would a resistance level become a support level? Consider the following. After hitting the resistance at $14 the stock traded lower. Those who sold it were feeling pretty good about it and are happy that they made the decision to sell. The shorts are happy because they are looking at a profit.

But then the stock rallied and went higher than the level. Now those who sold it told themselves that they made a mistake. If the stock gets back to the level they will buy it back.

Those who shorted it are now losing money. They told themselves that if the stock comes back they will cover it and break even.  Investors who bought it at $14 are happy that it went higher and they tell themselves that if it comes back they will buy more.

Add to that the professional traders who see a clear level and want to profit from it, and now we have 4 groups of investors who want to buy the stock at $14. This is how resistance levels become support levels.

Tilray Inc (TLRY)

Click to EnlargeTilray (NASDAQ: TLRY ) researches, cultivates, produces and sells medical cannabis and cannabinoids.

We can see here that TLRYs long downtrend has finally broken. If you are bullish on the long-term prospects of Tilray, this would probably be a good time to buy it. It is starting to trend higher.

Like most things in technical analysis, trendlines are misunderstood. I even saw where a well know technical analyst said that trendlines are essentially meaningless . This analyst is wrong and I have no idea what he is talking about.

When markets are going lower the forces of supply are in control. If they are heading higher the forces of demand are in control. When markets are consolidating the forces are equal. If understood and used correctly, trendlines and trendline breaks are simply illustrations of these dynamics. They are not “mathematical absurdities.”

Of course drawing trendlines is an art and not a science, but with some practice and an understanding of what trendlines actually are they can be a valuable part of your analysis.

Hexo Corp (HEXO)

Click to EnlargeHexo (NYSEAMERICAN: HEXO ) grows and sells medical marijuana.

The situation in HEXO is interesting, and it may be setting up for a move higher. It has broken its downtrend, is at support and is oversold.

You can see that the $5 level is support. It was support in February and March because it was resistance in November and January and it is also important psychologically.

The last two times that HEXO was this oversold, in October and December, a large rally followed.  What does “oversold” mean? It is a measure of a stocks momentum. It is simply the price today verses the price X many days ago. When this number gets to an extreme, traders call it oversold or overbought.

For example, according to basic probabilities, 95% of all trading should be within two standard deviations of the average. If a stock more than two standard deviations away from the average it is considered ‘oversold’ or ‘overbought’ respectively. The odds are that it will revert back toward the mean.

Aphria Inc (APHA)

Click to EnlargeAphria  (NYSE: APHA ) produces medical marijuana. Its products include capsules and vaporizers.

Over the past few weeks, APHA has been consolidating and trading between $6.90 and $7.14. Longer-term, there is resistance at the $7.30 level and support around the $6.25 level. If the $6.25 level breaks, it will probably become a resistance level.

How does a support level become a resistance level? It happens because those who bought it at the level are losing money now that it is lower. They tell themselves that if the stock comes back they will sell it to get out breakeven. Those who sold it are feeling pretty good after it goes lower. They tell themselves that they should have sold more and that they will if it gets back to the level.

The short-sellers are making money if it goes lower and tell themselves that they are right. If the stock trades back up to their level they will short more. Add to that the professional traders who want to profit off of a clear level and you can understand how there are four groups of interested sellers at the level. This is how support levels become resistance levels.

Canopy Growth (CGC)

Click to EnlargeCanopy Growth  (NYSE: CGC ) produces and sells medical cannabis. You don’t need to be a Market Guru to see that the $40 level is important for Canopy Growth. It was support in April and June and it is currently being tested again. This time however, it is not oversold like the last times.

This illustrates an important dynamic. When markets get to important support and are oversold they tend to bounce. If markets get to important support and are not oversold, they tend to consolidate before eventually breaking the level.

If the $40 level does break, there is a chance it could drop to $30 quickly. This is because in December it gapped up from $30 to $40 in a few days. Because it spent so little time at these levels, there probably isn’t much vested interest in this range.

Remember how support forms. After a stock rallies those who sold tell themselves that they made a mistake. They will buy the stock back if it trades lower. The shorts tell themselves that is the stocks comes back they will cover it and breakeven. Those who bought it wish they bought more after it goes higher. They tell themselves that if it comes back they will buy more.

In a situation like we have here when a stock gaps or trades quickly through levels, it doesn’t spend much time trading at these levels. Because of this limited time there isn’t a chance for significant buy interest to develop and form meaningful support in this range.

Due to this dynamic, gaps tend to refill. In other words, what gaps up may gap down. We may see that here with CGC.

Akerna Corp (KERN)

Click to EnlargeAkerna (NASDAQ: KERN ) develops and sells compliance software for cannabis companies.

In markets prices are always doing one of three things – going up, going down or staying the same. When prices are rising the forces of demand are in control. When prices are going lower the forces of supply are in control. When markets are trading sideways the forces of supply and demand are equalized.

A reversal day or reversal pattern illustrates the changing of leadership in these forces. In the case of KERN, we had a classic reversal day on June 20. The stock has lost about 50% of its value since then.

I like to use Candlesticks charts because it is easier to see patterns like we have here. Each day is considered a candle. If the stock closes above the opening price, it is blue. The bottom of the candle is the opening price and the top of the candle is the close.

If the stock closes below the opening price, it is red with the top being the opening price and the bottom of the candle the close. The highs and lows of the day, as opposed to the open and close, are shown by the little lines that are above and below the candles which are known as ‘wicks.’

On the morning of June 20 the forces of supply were clearly in control. The stock opened $10 higher than the previous close and by noon it was trading above $70. Then around 1:30 PM the demand dried up, and the forces of supply took over. They drove the stock price back down below where it opened and it closed near the lows of the day.

It also closed below the previous days closing price. This is an important part of a reversal day because it shows that the trend is changing. If had closed above the previous close then it would still be in an uptrend.

CannTrust Holdings Inc (CTST)

Click to EnlargeCannTrust Holdings (NYSE: CTST ) produces and distributes medical cannabis.

CTST may be setting up for a low risk trade. This is because it is oversold and at a clear support level. Most investors or traders are unsuccessful because they just guess. Successful traders can tell you why they are entering a position, where their profit target is, and where sell stop is.

The setup here, or reason why this may be a low risk trade, is the fact that CTST is at support and oversold. The trigger to enter the trade would be a break of the downtrend line.

The sell stop level would be $4.80 because if this level breaks it will probably go much lower. There are numerous ways to determine a sell profit target. For example, it is rallies 10% sell it. The important thing is to have a well-defined reason for selling it.

The most important thing is to have rules. If not you are just guessing! Buying it after the downtrend line breaks may not get you the lowest price, but the risk-reward ratio is better than just guessing.

If you just want to guess, stay away from the stock market and go to the Casino. You’ll still lose money, but at least you can get free drinks.

At the time of this writing Mark Putrino did not hold any positions in any of the aforementioned securities.

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