Technical Take: Marijuana Life Sciences Sector (HMMJ), MLCC Index Looking Heavy

Benjamin A. Smith
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The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) is being met with stiff resistance, threatening the near-term upside potential of the cannabis sector. The weakness comes in lead-up to a key third reading vote on Bill C-45 (Cannabis Act) on June 7, which is widely expected to pass. We explore further.

Leading with the Midas Letter Canadian Cannabis Index, the chart shows the top capitalized marijuana stocks in Canada are having trouble gaining traction lately. Since a notable May 28 gap-up—lead by Canopy Growth shaking off profit takers following its NYSE listing—the index has flatlined. Most importantly, any attempted on-open rally is being thwarted on the upside. This containment is best captured on a 5-day timeline.

This fragility is corroborated by HMMJ—the benchmark Canadian cannabis exchange traded fund. The 15-min intraday chart clearly shows defined pockets of resistance between the left shoulder and underside of the May 18-24 channel floor. Both areas are stymieing bulls attempts to push prices higher.

Looking at the bigger picture, we can cannabis sector prices collective met a wall of resistance at the simple 100-Day MA, and have been in consolidation mode since. That takes us where we are today, between two lower layers of resistance seen in the chart above. Should prices fail to punch through, there’s little in the way of support until the $16.83-$17.00 area. The former is HMMJ’s 50-Day simple moving average; the latter is the previous channel upper boundary and head & shoulders floor.

So why have cannabis life science stocks gone lifeless? From where I sit, a couple of factors are putting the damper on prices.

The first being the expected third reading Senate vote on Bill C-45 on June 7. It’s not so much that market participants are worried the bill won’t pass; it’s more to do with the amendments which may follow. On Monday, a Senate committee passed 40 amendments to the federal government’s cannabis legalization bill.

While most of these amendments are innocuous to the sector, some could have material impacts to the business operations of some cannabis companies.

For example, one committee amendment could lay the groundwork for regulatory limits on the amount of THC contained in cannabis products — in other words, potency limits. Such a restriction could have negative ramifications to makers of refined recreational goods and sales of popular cannabis strains. Specifically, the Report of the Standing Senate Committee on Social Affairs, Science and Technology recommendation states:

“Your committee supports this recommendation and expects the forthcoming regulations on THC levels in cannabis products to reflect a careful, science-based approach. Your committee recommends that the Senate review the regulation of THC levels in cannabis products and expects the Minister to report to the Senate after the regulations are adopted.”

It’s also unclear whether personal home growing will be banned completely, or limited to a certain number of plants.

Cannabis stocks are also lacking definitive catalysts to push the needle forward in the wake of Canopy Growth’s NYSE listing. This is still very much a momentum and news-driven market; no news is not good news. We’ve seen this equation repeatedly in recent months: when significant news flow stops, cannabis stocks begin grinding lower. While the fluff press releases never stop coming, the substantive ones have been lacking over the past week.

Final Thoughts

While we don’t particularly enjoy being the bearer of bad news, we must say it like it is. In our view, the cannabis sector—as defined by HMMJ (and all its individual components) and MLCCI—is facing capitulation risk heading into next week. This is demonstrating itself on the charts, and is being supported by the lack of catalysts (we’ve seen this movie before) and uncertainty going into the Senate’s June 7 Bill C-45 vote.

For momentum traders and long term investors, the presumed scenario should allow both groups to profit for entirely different reasons.

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Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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