Technical outlook 2022: Cannabis stocks
Let’s be honest. 2021 hasn’t been a good year for cannabis. We started the year with some excitement and hope the new Democratic administration legalizes cannabis federally. Things seemed to be progressing in the spring with Chuck Schumer, but cannabis was put on hold due to other pressing government issues. Of which there were a lot … and 2022 will probably see more.
The current legalization of Cannabis will always be the hot topic in 2022. To end the year, we gave new hope with Republican Nancy Mace. But nothing worked. Then, in early December 2021, the marijuana banking reform was incorporated into Congress’ annual military spending bill… but failed.
Here’s a great summary from Forbes heading into 2022:
After years of inaction, this Democratic Party-controlled Congress seemed the most likely in decades to pass a major reform of federal marijuana policy, which has remained largely unchanged since former President Richard M. Nixon signed the Controlled Substances Act over 50 years ago.
While Majority Leader Chuck Schumer and other leading Democrats sponsored outright federal legalization, the best chance of winning in Washington seemed to be what’s known as the Secure And Fair Enforcement Banking Act.
Currently, most of the big banks refuse to work with cannabis companies, all of which are illegal under federal law. This means that state legal dispensaries and other businesses that deal with marijuana are in turn obligated to pay state and federal taxes (along with all of their other bills) in cash.
The SAFE Banking Act promised to ease this situation by prohibiting federal banking regulators from punishing financial institutions that work with “legitimate cannabis-related” companies.
2021 ended without significant reform of the cannabis industry. Hoping that 2022 will be different. Will 2022 be the year the United States finally legalizes marijuana at the federal level? Or will it be another disappointment for cannabis investors? I’m not someone who really has high hopes for government (especially career politicians who have been in power for decades and haven’t done anything) doing what they say they’ll do, but to what it’s worth, Chuck Schumer is back in the spearhead of cannabis legalization. Judging from his Twitter, he seems a bit more focused on student debt, but he tweeted it in December:
Personally, I would focus more on the American side of things rather than the Canadian side. A catalyst at this point seems more likely south of the border. Also, I would focus more on real cannabis growers. Edibles and retail don’t really interest me because of the competition, but of course there are pearls. Oddly enough, I like the producers because it also incorporates elements of farming and farming. It’s kind of my thing. Check out my weekly roundups from the agriculture sector. But companies like Agrify (AGFY) and others that focus on integrated vertical and indoor farming solutions are developing fully integrated, data-driven, evidence-based growing solutions for cannabis, hemp. and other high value-added crops.
Cannabis from a cash flow perspective also catches my imagination. The stock markets are up because there is nowhere to go for performance. As long as the Fed’s easy money policy continues, equity markets will continue to move higher. Also add the inflation element. The reason inflation is rising is because of the Fed. Money is not going to productive things, and we are now in a situation where there are people with more money competing for the same number of goods and services. To fight against rising inflation, money will flow into the stock markets. Dips will be purchased, but here’s where cannabis and other industries can benefit: Cannabis looks cheap compared to everything else.
If the markets continue to rise, money will start looking for cheaper things betting on everything to “catch up”. In other words, the money will start looking for good deals. Again, I suggest keeping an eye out for American cannabis growers. It might sound too simple for readers, but I really don’t think this market cares about fundamentals like forward guidance and p / e ratios. It’s about chasing performance.
If you don’t want to choose individual cannabis stocks, I suggest the MSOS ETF or the Pure US Cannabis ETF. The name tells you what this ETF is all about.
“MSOS is the first and only actively managed US listed ETF with dedicated cannabis exposure focusing exclusively on US companies, including multi-state operators. The portfolio manager allocates among an investment universe of US companies spanning a variety of cannabis-related companies.
Here are the holdings, and these are exactly the companies that I would monitor individually if you prefer. Companies like Trulieve, Green Thumb, Ayr Wellness and Curaleaf are on my list.
On the technical side, I have a weekly chart for you guys. As you can see, 2021 has been a difficult year. But recently we hit a major support area on the weekly chart at the $ 24.00 area. I’m not going to lie, but technically it’s exciting. Price action is important as last week we had a red weekly candle close below this support area. Depression. Very bearish. But on the retest, we closed above $ 24. A false exit or a false failure. Bullish.
Check back to the weekly candle on November 0, 2020. Cannabis bulls would like to make the same 128% move from this support. I wouldn’t be eager to pull the buy trigger this week, I would rather wait until the first few weeks of January. We could either vary here or roll back lower to retest $ 24. If we can get a weekly close above $ 27.00 (would trigger a pattern on the daily chart) that would be a long trigger with investors placing a stop loss below $ 24. Just ride.
If you are investing in US cannabis stocks, I suggest that you keep your eye on the Russell 2000 Index, or the Small Cap Index. In the Market Moment articles, I mentioned how American cannabis is following the Russell 2000 trajectory. They are listed on the OTC, so that makes sense. Technically, these are “small caps”. With the Russell 2000 rebounding to major support, MSOS has a high likelihood of calling. If the Russell for some reason drops below 2120… then that would initiate a further downtrend and a bear market, which suffices to say, would not bode well for MSOS. New records would be a sure thing.
Finally, let’s take a quick look at the weekly charts of the aforementioned companies (Ayr Wellness, Green Thumb, Trulieve, and Curaleaf). I will show the charts of the US market, but they can all be traded on the Canadian stock exchange. The charts look the same, just in Canadian dollars of course.
Most graphics will look like MSOS. A downtrend, with signs of a dip at support level. Curaleaf here received offers at $ 8.00. What I want to see is a confirmed weekly close ABOVE the downtrend line I have drawn.
Ayr Wellness has posted record declines on the US list. The Canadian list can give us some indication of where support can come in. Ayr is finding support and bouncing back in Canada, meaning the US listing may have bottomed out at $ 12. The next few weeks will be big. If we can get a weekly close above the moving average here, that would be huge. I would also like to see a weekly candle close above $ 16. This would trigger a nice inverted head and shoulders figure on the weekly chart. And who doesn’t love reverse head and shoulder patterns?
The last two charts here are somewhat different. Green Thumb held up relatively well, rather than a direct drop. The decline was a bit more choppy and held above the $ 18 support area from November. I like this level for a bounce. We are seeing some nice price action here so far, but a nice strong weekly close above my moving average and this downtrend line will allow this stock to work. This could be triggered by the end of this week, giving us an opportunity to enter the first week of the New Year!
Last but not the least, Trulieve. Everything I have said about a small group candidate has been met here on Trulieve. A rebound from support, a weekly close above my moving average and a weekly close above a downtrend line. There could be some intermediate resistance at $ 28 which could create a pullback from our breakout for a re-entry opportunity. Then a weekly close above $ 30 sets us up for a new major uptrend.
The cannabis charts are setting in well at the end of 2021 and hinting at a significant 2022. Will government decisions influence cannabis? Or will the money pour into space, no matter how cheap they are in comparison? Time will tell us.