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Charting Man Dan from The Chart Guys Peerless Technicals on Recent Cannabis Sector Events

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

The Chart Guys stock trader Charting Man Dan McDermitt provides technical analysis and insight on the correlation between cannabis stock prices and the S&P 500. Charting Man Dan states that that S&P is a critical gauge of the overall market, which is why cannabis stocks have tracked so closely. McDermitt also reveals that cannabis stocks have lacked volume lately and when that occurs algorithms takeover, which are correlated to the S&P especially for companies listed on the NYSE and NASDAQ. McDermitt’s market outlook heading into American Thanksgiving is not positive and recommends defensive positions for retail investors. He endorses locking in profits and suggests using stop losses to prevent dramatic overnight drops. Looking ahead, McDermitt states investors will find out in the coming days whether the market is going to breach its February lows.  He walks viewers through the technical analysis of two charts: Canopy Growth Corp (NYSE:CGC) (TSE:WEED) (FRA:11L1), which follows the S&P closely and ancillary cannabis company Innovative Industrial Properties Inc (NYSE:IIPR), which has bucked market trends.

Transcript:

James West:   My next guest is Charting Man Dan McDermott, who’s one of the principals behind TheChartGuys.com. Dan, welcome back.

Dan McDermitt: Glad to be back, James. Thanks for having me.

James West:   Hey, Dan, your input is always highly valued here, and your insight into what is moving the market from a technical basis is peerless in my regard. I’d like to talk to you about some of the events we’ve seen. For example, we’ve sort of noticed a correlation in the last 10 days or so that where the cannabis sector has become more dependent on what’s happening with the S&P, and I’ve wondering if you’ve observed that, and what sort of is your take on that.

Dan McDermitt: Absolutely, I would certainly agree. The S&P 500 is very critical to the overall gauge of the market sentiment, and it’s going to be reflected in most markets, especially one that’s so high risk and a little bit less developed, like the MJ space currently is.

In my opinion, these correlations pick up because when you have hype and euphoria, like we had leading up to the first day of legalization sales in Canada, that’s when there’s volume, and now volume can sort of guide the market on its own. But when that hype fades and you no longer have that significant volume coming in, that’s when the algos and the bots take over.

And so these Canadian names that are listed on the major exchanges – the NYSE, or the NASDAQ, like CRON and CGC, they have these bots correlated to the S&P 500, and that’s the main driving force, as there’s not this, you know, steady influx of volume that’s allowing the price to pretty much act on its own as a sector.

So you’ll see that those names that are on the NYSE and the NASDAQ are significantly correlated to the S&P 500, and in my opinion, it is due to those bots and algos doing the automated trading.

James West:   Interesting. So then, going forward in the future, do we need to keep more of an eye on what’s happening sort of on the macroeconomic scale that it drives the S&P, in terms of planning our day trades in the cannabis sector?

Dan McDermitt: Yeah, absolutely. I mean, if we’re in a – we can just the see, the again, it’s always back to emotion. When we’re in a very bullish market, we have euphoria, and we have people very easy to get excited and to say Yeah, these projections, we can hit these, and these can be the market caps. And then when you see the weakness that you’ve seen in the past month in the S&P 5000, the narrative shifts. I mean, how many times did we see Canadian MJ articles talking about who’s going to be the next deal: Coke, and ACB, and all, you know, these predictions about what’s going to happen; when’s the last time we’ve seen one of those articles? And it’s just because the sentiment has shifted. Now, you know, we’re getting articles about maybe the government is overstepping its boundaries a little bit, or the person who was blocked at the border is now banned from the US because he’s, you know, dealing with Canadian MJ stocks.

It’s a complete shift in the sentiment of the MJ space, the articles reflect that, and we need to be aware of what the overall market sentiment is when we make our daily game plan as a trader.

James West:   Mm-hmm. Okay, so what is the sentiment telling you today going into this Thanksgiving Day weekend down there?

Dan McDermitt: Sentiment, it’s not good, to be honest. The bulls are not proving anything; the S&P 500 just saw a very weak bounce attempt to start the morning, or to start the week, I should say, and it’s just not giving confidence at this point. We’re seeing the bounces sold into Canadian MJ is responding in kind with seeing bounces sold into, and it’s hard for the bulls to get any kind of momentum going. So as we head towards the end of the year for me, I need to wait for the S&P 500 to shift its sentiment and to start to see some hope and some upside, and honestly, it goes all the way back to the trade deal with China.

And I know a bunch of Canadians are probably not excited to monitor their Canadian MJ positions; they need to be tracking what Trump is doing and what this China deal is doing, but in the grand scheme of things, it is important to know the macro level of what is going on in the economic world.

James West:   you bet. So how do we play from a technical basis in such a market? What are you doing?

Dan McDermitt: I’m personally all cash and being very protective and locking in my profit as a bull when I have it, knowing it’s swimming upstream to a certain degree, trying to play bullish in this market. So what I do is, I will wait for the longer-terms trends to change, which we can look at one of the charts here in just a minute and some potential signals for that, but the trend has to change, and euphoria, or I should say, the emotions, will change with the trend. If and when that does happen, and that’s when it’s going to be easy to get aggressive again as a bull in this space. But until that happens, I’m trading less as a bull or even looking bearish, and our trading styles are definitely reflecting the fact that the market is in a cautious period right now.

James West:   All right, Dan. So what can we tell, looking at technical signals, that could have warned us about this downdraft that we got sucked up in?

Dan McDermitt: Well, a downdraft on the S&P 500 happened very quickly; it was back here on October 10th just that very high volume dump day, and it lasted two days. So when the pullbacks do happen, they happen extremely fast, and if we look on the weekly timeframe, we can see that it happened back in February, and the market did eventually recover, and then it happened again very similarly back here in October, just last month. So they definitely happen very quickly, and that’s why using stop losses as traders can help protect us, you know, from waking up to a ten percent kind of down day in the Canadian MJ market.

But what we have right now is a tightening range that’s going to dictate pretty much the momentum for the market as we start 2019. We have the low of the initial dump, which is a must-hold support, and we’re currently heading towards that level. So we’re going to find out in the next week or so, can the bulls hold that level and see some bounce off of it, or are we going to fall through that level and head back to the February dump lows, which would definitely increase some fear in the market.

We also have a clear resistance level that we’re watching. There’s two tops here, and if we look on the daily time frame, we can see with more detail we bounced and rejected, and then we bounded and rejected rom that exact same level: inability to break that double top and we headed right back down to support.

So we’re in this tightening channel right now, and pretty much, if the bulls are unable to break this level, which on spy is in the 281s, the bears are going to keep control of this current market and again, if we break that October low, we’re going to see some more increased fear. That’s when all the talking heads on CNBC, they’re going to start talking about recession, and all those buzzwords that get the public nice and riled up.

So that’s the key support that we’re watching into the coming weeks.

James West:   Interesting. And so, what are some of the more interesting charts that you’ve been following in the cannabis space?

Dan McDermitt: So always CGC, the industry leader, and it’s showing some very interesting correlations to the S&P 500, and we can just, you know, visually look: we have the low at the end of the October the high of the bounce was November 7th, and now here we are back at the lows. And we just pull up Spy again really quick, we had the low at the end of October, had the bounce, here’s November 7th right there, and then here we are back to testing the lows. So very significantly correlate in the last month of trading, and that’s why, for me personally, I always look at the S&P 500 first before I do my analysis on the Canadian MJ space.

But at this point, we can pretty much say the trend is not going to change for the bulls anytime soon. Anything on the weekly timeframe for CGG under $46 is jut another low or high. So from where we stand, we can see a 35 percent move, and still just set a lower high on the weekly time frame. So it’s going to take multiple weeks of a trend change to start to get going before we can even consider it, which is why the bears are very comfortable where we stand in this market at this point.

Another key stock that I’d be watching is IIPR, an this one is one that we’ve been watching since the IPO, because it was the first MJ name to IPO on the NYSE, and that was very significant for us. I’ve been trading US MJ stocks for eight years , that’s how I first got interested in trading, and it was the Wild West; a bunch of them were scams,  and I kept saying to myself, I cant wait till we have legitimate stocks on legitimate exchanges. And IIPR was ones to do it, but look at the last week of trading; it’s very clearly doing something completely opposite what the market is doing and what the Canadian MJ space is doing, and IIPR is a US based REIT, and they pretty much, their business model, to sum it up very simply, is they buy land from companies that need capital, because capital is so limited in the US with the banking centre not being allowed federally to interreact with it.

So they buy the land from the companies and then they pretty much rent back to these companies. So they give the companies they influx of capital buy buying the land initially, and then they just collect those monthly payments as their income. And they offer a dividend, and REITs, usually do, so REITs that issue dividends in times of uncertainty in the stock market are seen as a bit of a safe haven, because those dividends are a bit of guaranteed money.

So here we are hitting all-time highs on IIPR this week and last week as well, closing at an all time high just yesterday, and it is a very strong name in a sea of weakness n the sector, so definitely one to be keeping an eye on.

James West:   No doubt. So do you think that its stellar performance is because it’s more in the category of real estate investment trust, as opposed to being a cannabis producer?

Dan McDermitt: Yeah, it gives them that little extra barrier of security, in my opinion, and that is what has attracted some of this attention.

Another thing I want to talk about is the rest o the US MJ plays who aren’t listed on these major exchanges, and they have limited capital. We’re seeing less correlation with the sector as a whole and the S&P 500, because they’re traded on the over the counter exchange. And just looking at MedMen here, ticker symbol MMNFF, and one thing that we’ve been, you know, weary about with these stocks is that because they are in such an unfavourable business environment at this point with the laws, that they pretty much have to issue shares to raise capitals. And when you issue shares, you increase the supply of shares, and that causes the price to go down as the market prices in these newly formed shares.

So we had a scenario this past week where we had a halt and then a gap-down open as, you know, continuing news comes out about these deals where they’re issuing shares to raise funds, and that’s just something need to be aware of, that going long term in a stock knowing the future for US MJ is bright, that’s not enough. And it’s because the underlying financial statements where you can find out, you know, is this company strapped for cash? Are the going to have to dilute? And that is going to potentially drive the price down as there’s months and months and years and years as we patiently wait for federal law changes, we could potentially see continued further downside as these companies do need to raise funds. So that’s something to be aware of with these smaller-cap names in the US MJ sector.

James West:   The proliferation of US companies trading on Canadian exchanges, they come to market with $2-plus billion market caps that, you know, now matter how you look at their financials, they need to be backfilled to justify that valuation. That’s not going to happen for a long time in the future, and they come to market with these super voting structures that prevents retail shareholders from participating meaningfully in the voting process.

Does that have any sort of – do you have any sort of issue with that, at all? Does that affect your attraction or your revulsion toward these stocks? I’m talking about, like Acreage Farms, CuraLeaf, MJardin, True Leaf, etcetera?

Dan McDermitt: Yeah, it’s definitely a factor to be aware of as, you know, long term, and I had that thought just yesterday. As we were sitting there and saying, we know these companies are going to grow, and if our money is in them, we’re going to see profits. But what are you really 0owning? Are these companies ever going to issue a dividend? They have all the voting power, and I’m used to that because like I said, I come from penny stocks, and the officers always make sure and retain the ability to outweigh any of the shareholders, and it sis important, because it’s pretty much entrusting your money with all of these people, and you have to do extensive research into the background of these people to say, Have they been successful in the past? Can I trust them with my money?

So yeah, that is a bit of a red flag that you can, you know, justify looking past to put your long-term investment into it, but it’s definitely something to be aware of that it’s sort of entrusting the captains of these ships to guide it in the right way, and it doesn’t always work out that way.

James West:   Yeah, you bet. Dan, appreciate your insight as usual. We’ll come back to you very soon; thank you so much for joining me today.

Dan McDermitt: Absolutely. Glad to be back. Thanks for having me.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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