Understanding the relationship between fundamental analysis and technical analysis can mean the difference between decent gains and an absolute fortune. Take a look at how D.R. applied his technical expertise to these three cannabis stocks…
I’ve lived in the same house in Delaware for many years. We haven’t been compelled to move because it’s a bit like a nature oasis on the edge of our little university town.
We love it here because we get the best of both worlds. We live a medium-length walk from a large university with an enrollment of 24,000 students, yet our house in on an acre of virgin forest with a medium-sized creek running six feet from our screen porch.
With this vantage point, we get to view the world through two lenses.
Step out the front door, and we see suburbia: a bustling college town with great food and cultural activities that are just a 20-minute walk away.
Out the back door, we have a real-life nature reserve in the backyard. On any given day we’ll have two or three varieties of hawks hunting there. A momma fox and her two kits visit regularly. And last night a little spotted fawn slipped nimbly out of the underbrush and into the creek not 10 feet from me. Bambi then headed downstream lapping water and nibbling tender streamside plants without a care in the world.
I love seeing the world through these two different points of view.
And that’s very much how I see stocks – from both a fundamental and a technical perspective.
Two Worlds of Analysis: Fundamental and Technical
Most people are familiar with fundamental analysis, which aims to understand a stock’s future prospects by looking at business factors like the quality of the management team, the strength of the company’s financial reports, and future prospects for new products and services.
In short, fundamental analysis projects the price of a stock based on the many variables that affect the financial health of the company.
Technical analysis, on the other hand, is the study of human psychology, which is represented in the form of price action on a chart.
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Since human psychology and emotions will always be a factor in stock markets, the study of historical price movements of a stock relay the fear and greed associated with that stock. Technical analysts look for repeatable patterns and indications that can predict future price movements.
It’s important to note that fundamental and technical analysis work together – at least when used well! Many firms and traders use fundamental analysis to identify the top companies to invest in and then use technical analysis to help identify or refine the best timing for buying and selling.
Here at the Institute, Greg and his team already give you tons of great information about the fundamental side of cannabis stocks.
Today, and in many future communications, I’d like to give you some insight into the technical aspects of cannabis stocks and point out how we can use that analysis to increase our profits in this growth area of the market.
For right now, let’s look at two tools that I use often.
The Best Tools for Technical Analysis
The first shows the movement of price in a group stocks relative to each other. The second is a broadly watched tool that shows us both the long-term trend of a stock and important areas of support and resistance.
Here’s a relative performance chart of some of the more popular cannabis names. This is a busy visual, but it’s useful because of all the information it packs into one chart (there are explanatory notes below):
Some takeaways from this chart:
- Seven of eight of these top pot stocks are up for the year.
- Six have 20% or more gains.
- A whopping five have returns above 50% for 2019.
- Volatility continues, with wide price swings seen in almost all the stocks.
- This relatively new investing sector is outperforming almost all others.
- Wide divergence of stock performance shows the importance of stock selection in these emerging companies.
One Technical Indicator That Attracts a Lot of Eyeballs
For decades, institutions and analysts have used the average price of the last 200 closes of a stock (called a “200-day moving average” or “200-day MA”) as an indication of the long-term trend of the stock.
If a stock is trading above its 200-day MA, then it is still in a long-term uptrend. Trading below the 200-day MA signals a stock in a long-term downtrend.
Because this move from an uptrending stock to a downtrending one is so important, the 200-day MA then becomes a key support level for a stock that is moving down, or a key resistance level for a stock that is moving up.
The three biggest market cap cannabis stocks are key technical junctures on their charts – all testing their 200-day moving averages.
Cronos Group (Nasdaq: CRON) has been a strong performer this year and has respected the 200-day moving average quite well with a strong bounce off that well-watched line in the past week.
Aurora Cannabis (NYSE: ACB) is also in a week-long test of the 200-day MA.
The biggest of the pot stock pure plays, Canopy Growth Corp. (NYSE: CGC), has moved on both sides of the 200-day MA over the past year and is currently looking to break through the 200-day line and resume its bullish run.
With Canopy set to announce earnings shortly after the market closes today, good news from the company could catapult the stock above this key level, receiving a slingshot effect back to the $50+ level.
With a volatile sector like cannabis stocks, adding a timing element to your buying and selling decisions is critical.
Using the tried and true formula of buying on pullbacks is a prudent way to time entries when adding a new company to your portfolio or adding to existing names in the Cannabis Investor’s Report model portfolio or the Cannabis IPO Insider model portfolio.
With three of the key stocks in the sector at important support levels, this is a good time to make those moves.
Make sure you have all the resources you need in order to make the biggest profits off of these plays.
For future articles and updates, let me know in the comments sections what other cannabis charts you’d like me to review or ask any of your questions about technical analysis!
Great Trading and God bless you,
D.R. Barton, Jr.
Cannabis Technical Trading Expert, National Institute for Cannabis Investors
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29 responses to “How to Make Your Next Pot Stock Purchase at the Right Time”
June 20 2019