Part IV – What The Cannabis Charts Say – Technical Analysis

Summary

• The Three Inflection Points of all 2021 Cannabis Stocks.
• A Comparative View of Stock Price Performance over the past 5 weeks.
• Interest rates and The Fed.

The Three Inflection Points

There are three major inflection points on all cannabis stocks in 2021. The first was at the top of The Weed Bubble of 2021 on February 10^th Popped! (see Part I).

Below is the weekly for The MSOS ETF. Off the top, the industry traded lower but then gained some buying demand from news that Senator Chuck Schumer said he was going to save the world, The State of New York and New Jersey opened up and The Supreme Court of Mexico ruled cannabis legal.

The second inflection point happened when Chuck did nothing to save the cannabis world, but he did come up with a great idea about federal excise taxes on cannabis products. You can see below the downtrend line kicked back in on July 14^th after Chuck found a camera. The orange line is the AVWAP from the 14^th, the anchored volume weighted moving average. This is a moving supply selling resistance line.

The third inflection came when a Republican politician was going to also save the cannabis world. Look at the volume explosion at the bottom. It is safe to say that everyone is trading off news and betting on politicians.

• 32.06, 25.74 and 22.22 are support levels for the MSOS
• While the downtrend line was broken up through, the MSOS is now back below it
• This chart is after the close on December 14^th, the day before The Fed meets

• The components of the MSOS mostly include stocks that are losing money. Very few are profitable.
• The banking regulation changes everyone wants got stripped out of a Defense Bill. Tell me, how does Weed = Defense? Who thought that was going to happen? Maybe a politician is a winner because they can now say they tried when running for their mid-term election?

The third inflection point was yet another news-driven response by investors and traders on November 5^th. There were articles out within a day about the MSOS BREAK-OUT! When a downtrend line is broken, it does not mean a reversal. It means that now the trading can go UP, trade SIDEWAYS or continue to trade DOWN. What trading above a downtrend line most always does is it attracts attention, volatility and volume from fast money players. Breaking up through a down trend line means fast money can trade it again with enough movement in price to create profits.

A dying stock under a down trend line means only the shorts are sitting tight. When a downtrend line is broken, counter-attacks can show up to squeeze the shorts that placed the bets on the downtrend line which had probably been entered weeks or months previously.

In Part III, I mentioned that at some point the money-making cannabis stocks will separate from the losers in the industry. Whether or not November 4^th is that point, there is no way to yet firmly know. What can be done is compare the performance since then which is 27 trading days – over 5 weeks. Here are the percentage returns from the close of November 4^th which was the close before the news:

Comparative Stock Performance since that huge breakout MSOS ‘party’

• The bottom P&S 5 are in totally different industries and trade with their groups, while they do business with the pure-plays. Even the classification of cannabis stocks in health care is pretty random. They are a consumer product.

If you look at all of the MSO cannabis stock charts, they look similar. The LP charts look uglier. If you have read my other 3 pieces out here, the Canadian market is saturated and most of the LPs seem to be saving their money, consolidating infrastructure and waiting. Meanwhile, all cannabis stocks are dropping.

Yesterday was another news trade of ‘OMG, look! Curaleaf got a loan at 8%! Well, TrueLieve got a large loan from AFCG Gamma at 9% months ago (see Part III). Did that solve their banking problem? Do you think this loan will make all the difference in Curaleaf’s stock price performance? As an investor, you care about nothing but the stock price.

The scariest thing I heard last week was when a top bank market strategist stated on CNBC they now expect 3 Fed rate hikes in 2022. Goldman also upped their hikes. Everyone has. That inflation thing. It is strange how inflation hits a group of stocks that already only get high loan interest rates?

The Zweig's Fed Indicator

Three Steps and a Stumble: ‘Whenever The Federal Reserve raises either the federal funds' target rate, margin requirements or reserve requirements three consecutive times without a decline, the stock market is likely to suffer a substantial, perhaps serious, setback.' (Technical Analysis - Chapter 10: Flow of Funds, page 183. Kirkpatrick & Dahlquist, 2007.) Accuracy record of results - 87.5%.

The Fed use of multiple QEs and buying all sorts of different bonds to liquefy the market got into the game after the 2009 home prices collapse. Is their pulling back on the taper the first stumble? It does significantly change a large amount of the Flow of Funds in the market.

Right now we have a historic high margin, or very close to. Trim that in, things get sold from individuals’ accounts. They sell the return losers they see on the screen too often for too long, then the money-losing stocks, then those with too high PEs.

RULE #1: DO NOT FIGHT THE FED.

Once The Fed gets going, value stocks win, or at least they lose less. Stocks losing money get slammed.

RULE #2: FEAR IS STRONGER THAN GREED.

Stocks drop faster than they go up. If this market is going to get a correction, knowing where good shorts are, makes a difference. The Big players tinker with their long and short mix to produce superior returns.

Best of luck tomorrow!