Marijuana Stocks Down From High; Watch This Technical Indicator for Opportunities

Pot Stocks in Holding Pattern After Reddit Spike

Momentum toward marijuana stocks resurfaced with a vengeance after Joe Biden won the presidential election and offered a pathway toward the legalization of recreational pot nationwide.

While we haven’t heard about the possibility of federal marijuana legalization yet, the House Democrats have already passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), which would decriminalize cannabis.

And while the MORE Act could face pushbacks in the Senate, I’m encouraged by the trend of more states legalizing medical and recreational marijuana.

In my view, it’s just a matter of time before cannabis becomes a mainstay of everyday life in the U.S. without the threat of incarceration.

Recall that, in October 2018, Canada became the first major Western country to legalize recreational pot. The growth of the legal cannabis industry in Canada has been slow, but much of that has had to do with the higher cost of legal pot versus black-market pot.

My view is that, as legal cannabis producers become more cost-effective and lower their production costs, retail prices will go down.

Marijuana Stock Investors Adopt Wait-&-See Approach

Pot stocks spiked with staggering technical strength to 52-week highs on February 10 when the ETFMG Alternative Harvest ETF (NYSE:MJ) traded at $34.58.

That spike was driven by momentum traders from the “Reddit” stock forum “WallStreetBets,” so I’m not surprised to see the subsequent selling.

In the time since the February high, the ETFMG Alternative Harvest ETF has recorded a major retrenchment. It’s down by about 35% to the current $20.00 handle, just below the 50-day moving average (MA) of $22.72 but well above the 200-day MA of $15.47.

Chart courtesy of StockCharts.com

The ETFMG Alternative Harvest ETF is holding a golden cross pattern, which is a bullish technical pattern that appears when the 50-day MA is above the 200-day MA.

The near-term direction looks neutral, with the 14-day relative strength index (RSI) hovering around 47, well below the bullish 70 level.

Since the February spike, the majority of marijuana stocks have retrenched by more than 30% to more reasonable levels. But as the economy reopens and people spend their stimulus checks, I expect the legal pot sector to benefit.

Going forward, I expect pot stocks to trade on news, but as evident by the performance of the ETFMG Alternative Harvest ETF, the current technical strength is neutral. Therefore, I expect that tight trading is on the horizon.

What I would like to see is the RSI edge higher toward 70. That would provide the catalyst for marijuana stocks to rise.

For investors who are interested in pot stocks, the best strategy at this point could be to monitor the RSI and look to accumulate shares on dips.

In the below table, I’ve listed 10 of the biggest marijuana stocks based on market capitalization (as of this writing).

Note that the near-term RSI is neutral or weaker in each situation. During the spike in February, the RSI for the 10 pot stocks was extremely bullish, above 70.

As a guideline for key technical levels, I’ve also listed the 50-day and 200-day MAs for each marijuana stock.

You may notice that, for each marijuana stock in the above table, the 50-day MA is above the 200-day MA. This is critical. Should the 50-day MAs break below the 200-day MAs, I would be concerned, but for now, the technical situation is fine.

Also note that eight of the 10 pot stocks have failed to hold their 50-day MAs. Normally from a technical perspective, I would be concerned, but the 50-day MAs in the case of marijuana stocks may be unusually high, given the spike in February. Because of this, the breaks below the 50-day MAs don’t really trigger a bearish signal at this time.

Analyst Take

Keep an eye on ETFMG Alternative Harvest ETF’s 200-day MA.

A drop in price to that level would be bearish and suggest further weakness. At the same time, it would provide pot stock investors with aggressive opportunities.