VIDEO: Charting Man Dan on the Value of Technical Analysis in the Cannabis Space
Dan “Charting Man Dan” McDermitt of The Chart Guys explains the value of technical analysis for investors. McDermitt believes both technical and fundamental analysis are key investment tools and a balanced approach is vital for investment success. Charting Man Dan stresses that technical analysis provides investors with an edge; it’s not about predicting future stock performance, but rather reacting to moves the market has already made. He stresses that high volume and liquidity are essential for accurate and useful technical analysis. Charting Man Dan walks viewers through several charts including the charts for Canopy Growth Corp (NYSE:CGC) and MedMen Enterprises Inc (OTCMKTS:MMNFF). He explains that investors need investing plans to limit exposure in the markets and recommends setting a stop loss point to curb damage from emotional selling. He expects investors will shift from staking Canadian cannabis companies to focusing on the underdeveloped American cannabis sector but believes the eventual leaders in that space aren’t yet clear.
James West: Hey, welcome back. My next guest goes by the name of Charting Man Dan; he’s Dan McDermott, one of he guys from the Chart Guys. Dan, welcome to our show.
Dan McDermitt: Thanks for having me, James. Glad to be here.
James West: Yeah, so tell me about the Chart Guys. What do you guys actually do?
Dan McDermitt: at The Chart Guys, our goal is education. We want to teach people to use utilize technical analysis to help with their decisions, whether it’s trading or investing, and in this wild world, when people first jump into the market, it can seem overwhelming, and we want to give our expertise from years of doing this and make that bridge to actually understanding what’s going to make that bridge a little bit shorter or people to actually understand what’s going on in the markets.
James West: Mm-hmm. You’re going to have to forgive me as a bit of a technical analysis Luddite, but I have been learning recently that there are signals in technical analysis that are clear buy signal that, nine times out of ten, absolutely define an imminent move. And to tell me about, why would someone rely on technical analysis as oppose to fundamental analysis, or why is technical analysis an important component in overall analysis, including fundamental analysis?
Dan McDermitt: I’d say you hit it on the head the second time, there. You know, there’s a spectrum of fundamental and technical, and I think being somewhere on the spectrum, and not at the extreme, is the ideal way to go about it. But with technical analyses, it’s a way to chart human emotion and a way to chart price action, an like you said, you can find favourable setups where we don’t know what’s going to happen but we know what’s most likely to happen. So you can kind of compare it like counting cards in Blackjack, were you don’t know the next card that’s coming but you have an idea in terms of what’s the most likely next card to come.
James West: mm-hmm. So I guess it’s a case of statistically, you cam rely on having an improved chance of knowing or predicting appropriately what’s going to happen in terms of placing your bet to the upside or the downside?
Dan McDermitt: Absolutely, you got it.
James West: Okay, so how long have you guys been doing this?
Dan McDermitt: I have been trading for eight years. We started The Chart Guys three years ago, and it took off way better than we ever could have imagined, an we built a great community around it, and can’t be more excited to com to work every single day.
James West: Wow, that’s great. Are there stocks where technical analysis is a better tool than others? For example, I find that in particularly in the Canadian mining space which unfortunately is where a lot of us wallow, you know, technical analysis doesn’t really apply because the stocks are so thinly traded and not widely held, and the floats are small, and some of them only trad by appointment only. So is technical analysis as important a tool in those cases?
Dan McDermitt: No, they’re not that, and you’re right: volume and liquidity is essential to technical analysis. If you have a chart with gaps all over it, it’s not going to be much help, but when you have, you know, high liquidity, high volume and dollar volume doing on, it definitely can be useful.
James West: So tell me about its functionality in the sense of price commodities futures. Or example, the price of gold, if I were a technical analyst, which I’m clearly not, I have found there is no way to predict what is going to happen in the price of gold, at least in the spot market or the futures market, using technical analysis, though it is liquid and it is an active asset class. So, how does technical analysis apply to commodities like that?
Dan McDermitt: Well, you know, we do actually chart, you know, futures contracts like that, and again, we want to make it very clear, because people think, you know, technical analysis, you can’t predict anything. And we want to be very clear; we’re not trying to predict things, we are reacting to things. So if a certain price level breaks, traders recognize that price level breaking and they react to it. So if I see a key resistance level break, I jump into the trade, and the whole momentum is already going, and then I protect my trade. And then obviously risk assessment is a very important component of trading, but recognizing breaks of price level, you can absolutely do it on futures contracts and commodities, as well.
James West: All right, Dan, that’s really interesting. Why don’t you run us through a couple charts here and give us a sort of an idea as to how you work?
Dan McDermitt: So right now, we’re watching CGC chart and that’s the sector leader for the Canadian MJ space, and we like to chart the names that have the most dollar volume, and we see us more and more Canadian MJ names getting listed on exchanges, whether it’s the NYSE or the NASDAQ. The dollar volume is switching over to being heavier on the US side of things, so rather than chart weed, you know, on the Toronto Exchange, I’m going to chart CGC.
So what we’re looking at is a obviously a very significant sell off recently, and this is not surprising if you’re familiar with the space, because CGC has hit all time highs twice before and pulled back 50 percent. And what’s happened recently was almost the stars aligning for this current pullback, where we had the ‘sell the news’ event, which was the first day of sales. Everybody knew that the news was coming, the price ran up into that day, so the selloff was not surprising.
But what was surprising was the timing with the S&P 500 and major markets having a significant bearish month, and that only catapulted this move to the downside and made it more extreme. So we pulled back about 45 percent very quickly, where previously it took a lot longer to reach that 50 percent mark. So it’s added a whole lot of emotion and fear into that space, and it’s had traders now start to pay a lot more attention to the S&P 500. Previously, the S&P 500 was just in an uptrend for years, and it was almost like it was just taken for granted. Bu now that we’re not in that same scenario, the S&P 500 and the correlations of the Canadian MJ sector to the S&P 500 became a lot more important.
So right now we have a short term bounce trying to play out, really just trying to cool things off from the extreme pullback that we saw, and the most important thing for me is, can we establish a little higher low and then a higher high and then continue from this move? Is it just a little dead cap bounce, with an impulse move to the upside? Or is there going to be consolidation and then follow through to let us know that this bounce has some serious buying power behind it?
James West: Right. And so what is your conclusion?
Dan McDermitt: My conclusion is to, right now, remain protected, because in the both the US markets, the S&P 500, as well as Canadian markets, the bounce is taking place at about the same time, but we don’t have enough information at this point to be convinced that this is the bottom for now. So the bounce has started, there’s no doubt about that, and anybody that’s entered any positions starting in this bounce can protect those positions now, but we do need to see that bull volume – volume is our pure indictor, we always need to see volume behind bullish moves to believe that the bulls have follow through.
So essentially I am patiently waiting for a top of this initial bounce to be set, for a higher low, and then if we get that higher high, that will be meaningful for me.
Another thing is, we are watching the US MJ sector. That’s starting to get my attention now more significantly, and Monday I made an observation that the top 5 performers in the marijuana sector were all US names. So that captures my attention in a away, an it stands out even ore, ad we have names like MedMen and IAN, where the Canadian MJ market is hovering right around breakeven and not seeing a whole lot of action.
So we’re keeping an eye out for capital to shift from Canadian names, which have run up, they’ve established, they’re clearly leaders in the space, which is a lot less developed. We just had the Mexico news from the South that is adding a little bit of, you know, bullish sentiment to the space, and we do believe that the US market is going to catch up to the Canadian market in terms of legalization and forward progress, a lot sooner than people think.
James West: Okay, so I just want to go back to your comment about what you say ‘protect your position’. I’m assuming that you’re meaning buying puts to protect from the downside should it reverse?
Dan McDermitt: That’s one way to do it, and actually, I was watching your segment with CB1 Capital, Todd Harrison. He made a really good point; you guys were talking about his portfolio, heavily Canadian MJ, and he made a really brief note that they were hedging their positions by betting against the S&P 500. And that’s again a great way to hedge your portfolio with all these wild fluctuations.
Specifically what I’m talking about though is entering a position on the bounce, and setting a stop loss, you know, but at breakeven. A lot of traders get into trouble, and a lot of investors, when they just get in and they have no exit plan, and when things don’t go according to plan, and next thing you know they’re in the red, they start acting on emotions, whereas if you have a trade plan and already established, and you say, if it hits this price, I’m going to exit, take a step back, and reassess the situation, that allows you to make decisions with a clear head.
So I were in in this bounce looking for a long term entry, I would set my stop loss at breakeven or for a small loss, and allow myself again to get back, get all my capital, and make sure that the trend is changing for the bulls before getting into a longer term position.
James West: Right, okay, so I’m seeing here that you pulled up MedMen, and MedMen has had a rough go from the outset due to some, let’s call it capital structure issues and governance issues, and so what is – I mean, so is your assessment and your buying and selling activity solely defined by technical analysis, or is there fundamentally a reason to buy or sell MedMen at this point, and how do you sort of blend that with what the chart tells you
Dan McDermitt: We do take fundamentals into account, and you are definitely right: share structure is my biggest concern right now. So we started doing significant research, fundamentally, because we want to have a broad perspective of the market both technically and fundamentally, and yes, a lot of shares are potentially becoming unlocked, and their share structure and their float is going to significantly increase. So we played this bull move here over the past couple of days, but I’ve been locking in my profit yesterday and today because of the long-term concerns.
So this current weekend, I actually have time set aside where I’m going to dig through the financials, get a complete grasp as to exactly what’s going to happen with those shares becoming free trading, and look to establish again who are the leaders going to be in the US? Because we very clearly have the current leaders in the Canadian space, and right now it’s not as clear in the underdeveloped US MJ space. So we’re watching IAN and the potential merger with MPX, and again it’s always making sure the trend is in our favour. We want to make sure that the bulls are when we’re looking at long term positions, and right now we’re watching for a daily trend change to take place, which again would need tat higher low and follow trough. Ut just comparing these last two days where now, compared to the CGC and Canadian MJ bounce, we can see that it’s a much more convincing bounce. These three days for CGC are not even taking back that one bearish day on Monday, whereas when we look at MedMen, we hae, we’re well over the high on Monday. So a pretty different picture is emerging over this week between the Canadian and US names.
James West: So is your sort of assessment then, that the US names are a better sort of bellwether 4from a technical analysis perspective as to where the whole sector is going?
Dan McDermitt: Well, it’s the kind of thing where we’re looking to see where he money is going – you always want to follow the money. And if you see capital shifting towards these US names, and for them to be outperforming the Canadian names short term and, you know, on these bullish days, it does tell us that we need to be watching these names, because the risk-to-reward is going to be higher in these US names.
So there’s going to be more volatility in our opinion, there’s going to be big winners, and there’s going to be some names that are big losers, eventually. So we’re looking for the hype and the rush that hit the Canadian market, we’re looking for that to happen in the US, and we obviously want to be ahead of the herd. So we want to be on these names before CNBC and before all these talking heads start talking about them.
James West: Interesting. So what’s your sort of technical analysis guiding you to believe in terms of the sector generally, going forward in the long term?
Dan McDermitt: Well, honesty, it’s the past two weeks have really shown us that it’s really important what the S&P 500 is doing. So I have a couple game plans in terms of what I see the S&P 500 doing from here, and that is going to determine whether I’m comfortable having my money in long term marijuana positions or whether I’m going to stay as a short-term trader, keep protecting my capital, and essentially it’s going to be – I can pull up the chart right now on the S&P 500 – we’re watching for a potential head and shoulders pattern to form on the monthly time frame, where we would have a left shoulder of resistance, and let me get rid of these lines, here. So this would actually be our left shoulder, and this would be the head, and if we bounce and cannot get back to the all-time high and then roll over and lose this monthly higher and lower pattern, in my opinion that’s going to be the first signal of a potential bear market, which again we have not seen in a very long time. So that would again make me very careful with my Canadian and US MJ plays, because again, if the market is shaky and we don’t have strong sentiment overall, it’s going to be hard for these marijuana names to see significant upside as well.
James West: Right. So in the bigger picture, weakness in the broad markets is obviously going to imply weaknesses in the cannabis sector. So if you were to see sort of a spreading contagion in terms of the markets globally that was essentially moving it towards the downside, would you essentially pull most of our your money out of the market and go to cash and adopt more of a wait-and-see position?
Dan McDermitt: Absolutely, and that’s what I’m drawn to as a trader more, anyways. I’m more of a short-term trader, I’m very comfortable being all-cash, I’m not having to think about the market once the bell rings at the end of the day. So I’m drawn to that just as my nature, but I would absolutely be more comfortable with the set it and forget it mindset in this o, if the market stays healthy and if this monthly uptrend remains intact.
James West: Right. Okay, Dan, I really appreciate the insight here – it’s very informative, and I’m hoping that we can 4have you back on soon4. Thank you very much for your participation today.
Dan McDermitt: I appreciate it. Would love to come back anytime.
James West: All right.
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