Charting Man Dan McDermitt, founding partner and analyst with the Chart Guys, explains the current relief bounce markets are experiencing and why Tier 2 cannabis names are surging. He highlights the correlation between oil prices, the S&P 500 and the cannabis space, noting that the recent relief bounce the sector is experiencing is following a surge in oil prices. McDermitt breaks down the cannabis industry into three tiers and suggests that large cap, Tier 1 names like Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) and Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) will be under more pressure to provide results this year. In contrast, mid cap, Tier 2 names like Organigram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG) and HEXO Corp (TSE:HEXO) (OTCMKTS:HYYDF) (FRA:74H) should be more interesting for short-term traders as a lack of liquidity has helped share prices surge for Tier II names.
James West: Gotta love that rock star beginning, eh, Dan?
Charting Man Dan: It gets me every time, it’s great.
James West: Oh, I love it! How are you? Happy New Year!
Charting Man Dan: You too! Good to see you.
James West: You bet. Dan, let’s jump right into it: you made some interesting comments towards the end of last year suggesting that we needed to see some things happen in order to cause a reversal in the broader market as well as in the cannabis sector. Why don’t you walk us through that and what you saw that actually did unfold to cause the reversals we’re now enjoying?
Charting Man Dan: So, it’s a global market, ad there’s so many interconnected pieces, and oil and the market are very generally correlated. And we could see that the top of oil was in October, and that correlated with the top of the S&P 500. So in order to see any kind of significant bounce in the S&P 500, we needed to see a significant bounce in oil and then, of course, if those two events happen, then we’re going to anticipate that the Canadian MJ space is going to bounce as well. And that’s how it ended up all playing out: both oil and the S&P 500 bottoming at the same time – a complete shift in sentiment from fear that, you know, the markets are collapsing, to everybody jumping in on the bounce at this point.
So it was oil tat was an initial indicator for me, and then of course the S&P 500 following along with it, and that took all sectors with it as well.
James West: So the price of oil, I mean, it doesn’t really look all that strong at this point. So does that indicate perhaps that the reversal that we’re enjoying is perhaps a little bit tenuous?
Charting Man Dan: It’s certainly a potentially temporary bounce. Right now, we’re looing for just weekly lower highs to be set, and when we look for a trend change, we need higher lows and higher highs. This is a relief bounce from oversold conditions, and you know, some people get suckered into saying, Oh, that’s the bottom, and it might not be. So I’ll point out in just a minute what we have to see on the charts to be comfortable as bulls, and you’re right, we’re not there yet.
James West: Sure. So from a technical perspective, are you seeing anything to indicate that, you know, 2019 is the year that we sort of shift from a speculative expectation from the cannabis sector to a balance sheet performance sort of valuation perspective in that now we’re going to have full quarters of recreational reported in the Canadian context, but also we’re going to start to see some of these multi-state MSO operators that went public in Q4 and Q3 of 2018, and sort of under-performed; we’re going to see some more financials from those companies that’ll give us a better sense what’s happening.
Is there anything in the technical analysis side of this that you see indicating either favourable optimism or pessimism and negativity?
Charting Man Dan: Well, in my opinion it’s going to be separated by different tiers of company. So Tier 1 will be Canopy, Aurora, Aphria, and Tilray and Cronos, and in my opinion, those are the ones that are going to be heavily focused on their results, because the market caps have already gotten to a very significant point where it’s time to, you know, prove it. All right, bulls, show us what you got! Prove it with these numbers.
So I think for them it’s going to be a different criteria of what the market expects as opposed to the Tier 2 names, maybe HEXO, TRST, OGI, and then maybe some other names in the US. But I believe that those names are still going to see some speculation-type running for market caps to get inflated, for the potential of any, you know, deals that could be worked out…so we’re looking at, again, the broader market to always dictate where sentiment is headed and what direction we’re looking. But I do think this a good point to distinguish these companies that have already hit the spotlight, they’ve already gotten all the attention and all the market cap that goes with it, and I think they’re going to have a little bit more of a burden to prove it with the numbers.
James West: Mm-hmm. So does that suggest, then, that, from a day-trading perspective that the Tier 2 names you were suggesting might be a bit more interesting because of the opportunity because of the increased volatility?
Charting Man Dan: Absolutely. They’ve got higher risk and higher reward with those names, and that’s where the short term traders are going to be looking, although those with larger capital, it’s still much easier to trade names like CGC, and that’s actually a difficult spot where if you have large capital, you know, you can individually move these companies, their share price, a couple of percent if you’re trying to enter all at once.
So it does get a little bit tricky, but in terms of risk to reward opportunity, it is the Tier 2, Tier 3 names that are going to have more of that opportunity.
James West: Okay. Let’s take a look at some charts, now, and you can demonstrate more visually at what we’re talking about, here.
Charting Man Dan: So here we’re looking at the weekly time frame for oil, first off, and we can see we had a bullish reverse of candlestick that marked the bottom and a two-week bounce at this point.
So what I was talking about with the trends needing to change, we need higher lows and higher highs. Our last lower high and our last resistance level is up at 54.55, so anything under 54.55 is just a lower high on this longer-term time frame. If we pull back and form a higher low on the weekly, and then change the trend, that’s when we ‘re going to see a change in trends, and obviously that’s what the bulls want to see.
So it requires brief consolidation and then a bull break to change that trend, and you can see the correlation where this is what oil looks like on the weekly time frame, and we pull up the S&P 500 and it’s weekly time frame looks very similar: a solid bounce, two weeks into the bounce, but again, we’re just looking for a lower high because the last resistance level was all the way up at 280. Anything under 280 is just going to be a lower high. You have to see the pullback to establish a base of support and then continuation to change that trend. So like you said, the bulls still do have work to do and still do have proving to do, and now that we’re seeing the start of this consolidation from the top of the bounce, we’re seeing that in the MJ sector as well.
So I can see CGC here – look at how different this bounce is. This is the weekly time frame; you can see the oil and weekly S&P 500 bounce was strong, this is a very weak bonce, and what I’m seeing and observing in this space is that the names that have already hit the spotlight – and in one of my recent videos, I compared it to , you know, in terms of percentage gains. If we’re looking at who’s going to see bigger percentage gains, we’re looking at CGC as, I compared it to bands that have already hit the spotlight, they’re on MTV, everybody knows their names, to increase their fan base a significant percentage, it’s just not going to happen, because they’re fan bas is so big.
So I compared that to CGC, already hitting the spotlight, we’ve already got some institutions involved, there’s a ton of market makers on it, so because there is so much interest on it already, the percentage gain that we’re going to see in the market cap, it’s not going to be a massive increase because it’s already so large.
So this was a fairly week bounce, but we see other names, like I was talking about, where their bounces were huge. So let’s just look at a comparison: CGC, from the bottom to the top of the ounce n the last couple of weeks, it bounced 16 percent, and that’s a solid gain, no doubt, but if you look at these other names, HEXO, from the low of the pullback to the high of the bounce, we ended up going 59 percent, that’s not even comparable, and you look at a bunch of names and there were significant correlations with the low cap names that are less liquid that are not trading on major dual-listed exchanges. So these exchanges, you know, were not listed on the NYSE or the NASDAQ, and in my opinion, that lack of liquidity means a little bit of dollar volume goes a long way to moving these prices.
So here’s GTII Green Thumb- they too, went 60 percent, and you have names likes, you know, N, these smaller companies, Namaste, they saw a significant bounce from their lows – so basically what it boils down to is, if you have more liquidity, like the names that are on legitimate exchanges in the US and dual-listed in in Canada, they have more market makers, there’s essentially more supply and demand of shares both – so a little bit of dollar volume doesn’t do a lot to move the price whereas the names that are only traded on the CSE and the OTC, there is way less liquidity, so a surge in volume leads to a very significant surge in price because there’s not as much liquidity to absorb that dollar volume.
James West: Mm-hmm. Fascinating. All right, Dan, so then where do you see the greatest opportunity for the retail guy who wants to trade short term in 2019?
Charting Man Dan: I would say these Tier 2 names, their bounce that they just proved, their 50, 60 percent bounces were significant enough that we can look for healthy consolidation to form that higher low. So just on this weekly time frame like I was talking about with oil and SPY, we need the higher low, and then the higher high to change the weekly trend. And because these bounces were so significant, the bulls have much more space to work with to be able to consolidate and form that higher low, whereas when we look at CGC on the weekly, there is not nearly as much space to work with to try to form a higher low and then change that trend. Like I said, we only bounced 16 percent, so if we pull back a solid percentage, we might drop down to a lower low.
So more space for the bulls to work with; I’m looking at HEXO, OGI, TRST, all these low cap names that had significant bull moves, and we’re just going to look at healthy consolidation to establish a higher low of support on the weekly time frames.
James West: Sure, you bet. Those are all great names. I’m curious, then: is there a correlation between the fact that when a company becomes listed on two major exchanges in Canada and the US, that its potential sort of range of volatility diminishes accordingly?
Charting Man Dan: I would say that’s absolutely what it leads to.
James West: Okay, well, that’s really interesting. We’ll be able to mess around with that in 2019, here. Dan, thanks very much for joining us again. We’ll come back to you next week and get some more great stock chart analysis.
Charting Man Dan: Appreciate it, James. Have a good day.
James West: Thanks, you too.
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