Technical Wizard Charting Man Dan on Bearish Reaction to Cannabis Earnings

Charting Man Dan McDermitt of The Chart Guys discusses the consistent bearish reaction to earnings statements in the cannabis space. McDermitt suggests the market got ahead of itself in terms of company valuations in the lead-up to rec legalization in Canada and indicates it makes no sense for bulls to jump into the space right now when investors are getting bearish reactions. Charting Man Dan provides technical analysis of an interlaid chart of the S&P 500 and Canopy Growth Corp (NYSE:CGC) and walks viewers through a day trade. When examining the Canadian cannabis space, McDermitt looks at five large cap producers: Canopy, Tilray Inc (NASDAQ:TLRY) (FRA:2HQ), Aphria Inc (NYSE:APHA), Aurora Cannabis Inc (NYSE:ACB), and Cronos Group Inc (NASDAQ:CRON). He notes that Cronos has held up better than its peers and worries that if Aurora breaks the $7.25 mark it has the potential for a double bottom.

Transcript:

Brandon Colwell:   And we’re joined not in studio but by Skype today by Charting Man Dan, back for another day of going through some TA. How’s it going, my man?

Charting Man Dan:  Good, how are you?

Brandon Colwell:   Doing well, and thanks for coming on. Usually you’re used to a different face; Brandon this time as opposed to James, but nonetheless, we’ll go through all the things that are catching your attention, and just seeing what the market’s doing, what you’re excited with.

Charting Man Dan:  Yeah, right now, this is a week for US MJ stocks to have earnings. We had all the major Canadian LPs fairly recently, and we’re getting into the swing of things. We have a solid, you know, 10=plus names this week, and after yesterday, we’ve already got our first three, and we’re having consistent bearish reactions to the US MJ earnings. So it’s the kind of scenario with so many companies having their earnings coming up, it makes no sense for bulls to be jumping in right now when we are consistently getting bearish reaction.

We had, Kira had a bearish reaction, RIV bearish reaction, KSHB bearish reaction. So it’s definitely still a bearish sentiment in this market, and we’re seeing that reflected in the market’s reaction to these earnings.

Brandon Colwell:   Yeah, I couldn’t agree more, actually, because we were actually talking about that yesterday on the show with Ed about, this really – it’s a hard case to be made to say that this is an investor’s market right now. There’s a lot of trading going on, you’re not seeing any good follow-through – you might get, like, a day and a half, but even yesterday, it looked like it was starting off well, green, but almost fifteen minutes, twenty minutes in, you started realizing, okay, no, this is changing. And it started pulling back, and you’re right. I mean, CuraLeaf came out with $21.4 million USD I think the number was, for their last quarter – that’s a good number, that puts them second in the US, and I think that puts them third in all of North America, above Canopy’s last quarter as well. So it is interesting seeing that, and then the market clearly didn’t respond well to that.

Charting Man Dan:  Yeah, it seems that the market got ahead of itself in terms of the euphoria a couple of months ago, and now we’re seeing that even with some decent earnings, it’s still not enough, because they were so overpriced in terms of market cap and forward-looking expectations.

So we have to sit through these earnings and ride them out, and of course, as always, the general market sentiment of the S&P 500 continues to have a major impact, and it’s still shaky ground there. So there’s not a whole lot for short-term bulls to get excited about, and patiently waiting until that sentiment does shift.

As am I, I know that you’re a trader at heart, and I’ve watched some of your videos 0 you do invest as well, but trading is where you really like, because you like to have control over your money, and right now it’s, I mean, at one point, I had over 25 cannabis companies in my portfolio during the prime of it, and I followed all of them. And I’ve gone back to having three just because right now, I mean three that it ruly believe are undervalued. But when it comes to going in and out of a few, I’ll trade from time to time, but it’s reall not more than days or weeks at this point – sometimes days, because you’re right, it’s – there’s no real confidence in the market right now.

We’re kind of in a limbo effect of, legalization is done, it’s already passed in Canada, October 17^th, and now it’s kind of in this awkward phase of show me what you’re about. But no one’s really at that stage yet for the numbers to justify their market caps.

I still that the likes of Aurora, of Canopy, of Wayland, of Aphria, of these larger companies where they have the good foundations, I still think they’re great investments; it’s just right now, if you’re looking at this, you’re going to constantly ask yourself: can I get a better price? And there’s a pretty high likelihood that if you’re an investor for the long term, you might be able to still get that.

Charting Man Dan:  Yeah. And it’s, honestly, for those that missed the initial run-up, or those that have cash, this is an ideal scenario, because they’re getting another chance, and if this is patience paying off for those that were able to wait for thing to come back to reasonable valuations. And it is going to take a kick from some kind of catalyst to change that sentiment, and, you know, a deal would do it. APHA or ACB getting a deal similar to Canopy, or even anywhere near comparable, would spark bulls and say, oh, yeah, you know, we still have potential catalyst for these individual names.

But until that happens, it’s definitely a patience game that we need to wait for market sentiment to shift for.

Brandon Colwell:   Why don’t we start jumping into some charts and seeing what you’ve been looking at today and this week?

Charting Man Dan:  Sounds great.

Brandon Colwell:   All right, Dan, what are we looking at, now?

Charting Man Dan:  So this is the S&P 500 interlaid over the CGC chart, and this is on the 5-minute time frame, so each candle stick represents five minutes going by. And this is actually from yesterday, because if you’re familiar with my charting and my analysis, I’m always talking about correlations, and we can get clues on how the correlations on how these two are interacting with each other.

And yesterday, we saw very clear red flags for the CGC bulls, because once the bell rang, we had a half an hour in a row of the S&P 500 just all bull action, meanwhile, in the background here, we had CGC with a half an action in a row of all bearish action. So as soon as we saw that, we can say, okay, there is a negative correlation right now that’s favouring the CGC bears. And it’s always important to note with that correlation is with the S&P 500, because like I said, we can get clues from that.

So in today’s example, I actually used this correlation to make a day trade on CGC – this is SPY now, on the 5-minute time frame; here was the open, we saw a bull move, we hit the high of that bull move at 10:10 a.m., and then we consolidated.

So I want to compare, what does CGC look like at that same time point in time. And here we are: CGC hit the low of the day; the top of the bull move was 10:10, at the exact same time as SPY, and look at the consolidation: we had 20, 25 minutes of this pull-back, and compare it to SPY: SPY was pulling back much harder, much more significantly, than CGC was.

So as soon as I saw this healthy CGC consolidation, and as soon as I saw this SPY pullback and I could say to myself, all right, SPY is going to set a five minute high or low and try to bounce here, I could say to myself, that’s a favourable correlation where a SPY bounce is only going to help the CGC bulls.

So I made an entry here at 31.90, and my target was potential for a new high of the day, and my stop loss being just a short term day trade, was going to be right down here at the low of consolidation. So I was risking $0.30 from my entry, ended up seeing some very nice follow through, and it ended up being a 2 percent move with $0.63 to the upside.

Unfortunately, I only got a 10 percent fill. I placed a buy order and I was just a split second late and the price ran away without me. Rather than chase it, I just sat on my smaller position. Still locked in a nice little win after a 15 minute hold, but could have actually been a really nice day0maker had I gotten my full fill.

So that’s just an example of how noting that CGC was holding up a little bit better than SPY, was a clue that I used to make that initial entry.

Brandon Colwell:   That’s awesome. It’s always interesting seeing a trader work, especially when you’re going off of something like CGC, like Canopy and the S&P 500. We all know that correlation has been really strong, and it’s just nice to see your thought process of going into the trade – obviously mentioning your stop loss. A lot of people out there who are trading who are new to it, they don’t use that enough; they don’t have a mental stop loss, which I think is a mistake.

And also to see that you had a target of being able to get out as well and hopefully being able to scalp a little bit from that trade.

Charting Man Dan:  Yeah, I mean, great point about stop losses, and that’s something that we preach every single trade needs a stop loss. And it’s just me trying to, you know, extend what I have learned from my  mistakes, because I used to not use stop losses, and one of the biggest, you know, leg ups that my game as a trader got was when I started using stop losses, because I would have, you know, a solid four days of the week with all profit, and then I would have one bad trade and I would give it all back.

And when I started using stop losses, I prevented one bad trade from erasing an entire week of strength. So that was definitely an essentially as a trader, utilizing stop losses.

Brandon Colwell:   No, and I agree, especially if you are trading. There’s a lot of people out there how, you know, they watch videos like yourself or they see other people and they’re like, you know what? I’m a day trader, too! It takes a lot more to be able to do it well, but to have a nice stop loss, that’s always a good point, because like you said, you’re able to at least preserve your capital. Because you couldn’t see all the technical points, all leading towards it going up, everything could be going well, and then all of a sudden it takes one piece of news in other market or just one person to have a huge sell order go out, and all of a sudden, all of your work unfortunately didn’t work. And if you didn’t have that stop loss, you could be looking at a pretty good loss.

Charting Man Dan:  Exactly. Nothing is ever a sure thing; all we know is probabilities, and what’s most likely to happen, but we always have to prepare for what we don’t expect to happen.

Brandon Colwell:   Exactly. Well, other than CGC, how’s it look today, actually, going into the trading? Is it still mirroring the SPY, is it working well? What is the outlook for this morning?

Charting Man Dan:  CGC is holding up slightly better. We can see right now on SPY, we had a clear, five-minute uptrend; they set a lower high and a lower low, and this is actually a bearish reversal head and shoulders pattern that just confirmed right now on some solid bear volume. And we can see that CGC is not following that; CGC still has these five-minute high or lows, so it’s a slight advantage for those CGC bulls.

That being said, you know, the daily chart, it’s not a big day by any means, but the bulls are just happy to be holding on and not falling below key support, which for CGC is $30.26. overall, the MJ sector, both US and Canadian, is pretty red today. It’s a pretty rough day, but it’s nice to see that we’re not seeing the tick-for-tick correlation with this SPY weakness on the 5-minute time frame right now.

Brandon Colwell:   Yeah, I’m looking at a bunch of my lists, either the Canadian cannabis or the US cannabis, and you’re right, there’s a lot more red today. There was red yesterday, as well, so we’re still seeing a pretty healthy pullback in these stocks, and even when they do have a little bit of, you know, a run of some sort, you’re really not that seeing that follow through the next day for the full day, and you’re definitely not seeing follow through for two to three days.

I think that goes towards your point you made earlier that , you know, this really is a trader’s world right now, and we really do need something, a delay of some sort, some sort of industry-changing event, to really get people’s confidence back. Because if you’re seeing something go up by 8 percent, a lot of people who were there, there was traders, and they’re taking their profits; you know what, good on you for doing that. But it does not seem like we’re getting a lot of traction in the US or in Canada right now.

Charting Man Dan:  Yeah, it’s the kind of market that goes one step forward and two steps backwards in the downtrend.

Brandon Colwell:   Well, are you looking at any other companies right now for current trades or potential trades that you’re looking to line up for yourself?

Charting Man Dan:  I like Cron. Cron has consistently held up better than its peers. When I look at the Canadian MJ space, I’m looking at the major five names, which is TLRY, CGC, APHA, ACB, and CRON, and CRON has consistently been holding up better than everybody else, and APHA has consistently been weaker than everybody else. But this is my favourite kind of pattern, which is just a tightening equilibrium where we have our low of the dump, high of the bounce, high or low is established, a lower high, another higher low, a rejection from resistance yesterday by four pennies, that’s another lower high – and here are the bulls trying to form another higher low. So it’s just getting tighter and tighter; the volume drops off in these equilibrium patterns, and then when we finally get a break in one direction or another, doesn’t matter which direction, we see a volume spike and some solid follow-through more often than not.

So at this point, 9.04 and 9.08 breaking would be a solid bull break, and for the bears, they want to see a break of 7.70 and 7.52. so for the rest of the week, we’re going to be watching this tightening pattern for a break towards the end of the week, and if we don’t break this week, we’re certainly going to break first thing next week. You can only get so tight before a snap is imminent.

Brandon Colwell:   Yeah, absolutely. So you’re not looking for this today per se, but you’re watching. Now, if it just broke at 9.08, would you then place a trade then? And look to ride it, because you’re now breaking out of the pattern? Or do you try to time it a little bit before breaking so you can get a little bit more of a return from it?

Charting Man Dan:  Well, in this scenario, it would be too far of a bull move to break resistance – meaning, the bulls would be too extended. The hourly chart would be over-extended if we were just to go straight up and break 9.08. So that’s not the kind of bull break I would want to act on; the ideal scenario for me as a trader would see this tighten up a little bit more, give us another daily high or low which we just formed potentially at 8.09, and then another, lower high compared to 9.04, and then a break of that lower high.

So the tighter you get, the more follow-through you can get, because I imagine, you know, it’s a bull who’s actually exerting physical activity, and if they have to exert that activity to get all the way up to the resistance and then break it, we’re not going to get much follow-through; the bulls are going to be tired, whereas if they’re tight and it’s nice and rested and then we get the break, on a tighter range, that’s when you get more significant follow-through.

Brandon Colwell:   Oh, great point as well. So for any of those out there who are trading, obviously start looking into this and looking into the pattern; that’s always something that’s nice to see forming, and you never know. Again, though, all it takes is one announcement and it can fly in either direction. It’s a high-flying industry, you can do all your due diligence, and all it takes is once piece of news to either help you or completely destroy your trade.

Charting Man Dan:  Absolutely, and that’s where the stop losses come in.

Brandon Colwell:   Exactly, that’s where the stop losses come in. well, what other companies are you looking at? Do you track, are you tracking ACB right now? I know they’ve had quite a pullback over the last few days.

Charting Man Dan:  Yeah, I’m tracking all the major names. Always. CGC as number one, and then watching how everybody is trading in relation to CGC, but here we are, if we break 7.25 here, the low today is 7.26, that’s a double bottom at this point – this is the US ticker, I believe – let’s make sure of that. Let’s go to Canada. So that is Canada. So 7.35, 7.26, if that supported level breaks, the next support is down at 6.67. So, we’re entering an area on a lot of these names where there’s just a lack of support because of how hard we ran on the way up. So the harder you run, the less support you build and the easier it is to pull back.

The one good thing that the bulls are liking is the declining bear volume on the weekly time-frame. I’m honestly getting ready for monthly charts to start forming some high or lows. With the amount of pull-back that we’ve seen, I think we can get some decent entries, unless the S&P 500 falls apart and breaks the low of October, I do believe that these names are going to have some decent entries compared to their support levels they established back in August.

So ACB, there’s APHA, another one here, just to compare it on the monthly time frame, to its August support – we’re getting close to it – and the amount of range from the low to the high of the bull run, to the amount of the pull back, we are looking for the August low supports to hold. And I do like the potential of some, you know, multiple week bull entries. It seems, you know, odd to say, as the sentiment is still clearly bearish and we don’t have much sign from the bulls at all, but it is an area that I’m keeping a close eye on, and I’ll be ready to act on if we do see a quick turnaround.

Brandon Colwell:   Boy, I always appreciate you taking the time and going through the charts. It’s one thing to be looking for fundamentals and what’s going on in the market – it’s a whole other thing to look at what these companies and their charts are actually saying. So I always appreciate your time, as do our listeners and our viewers, appreciate it very much.

Charting Man Dan:  Glad to be here. We’ll see you next time.

Brandon Colwell:   Absolutely. We’ll see you soon.

Original article: Technical Wizard Charting Man Dan on Bearish Reaction to Cannabis Earnings

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