In the very beginning of this year, the weed stocks found their bottom and changed their trend direction north! Trade Via Trend was quite ahead of this and posted a nice article about investing in a marijuana sector.
In long-term, the cannabis industry is absolutely going up. However, in short-term, we might be ahead of some profit taking, maybe longer consolidation.
Below charts depicts a story of well-known marijuana ETF that catches quite well a trading picture of the cannabis industry. A price has almost touched a long-term resistance – see a blue dashed line. The technical indicators MACD and RSI are showing bearish divergence – see the purple lines. Finally, based on ADX it seems like a general trend is weakening, although still quite strong.
A broad stock market is facing challenging times, at the moment S&P is fighting with a strong resistance. The weed stocks started to be more correlative with overall stock market since the last correction and thus, if there is another pullback in S&P, expect the same to happen to pot shares.
If you are a long-term investor, it is certainly not a selling time, however, also not a buying time, this is a holding time. If you are a short-term trader, you may consider selling. Below is a trading model that has worked very well since the ETF started to trade.
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9, 20 and 50 Moving Average Model
We have developed a technical model using three types of moving averages that have worked with trend determination pretty well so far.
- When the ETF is in a bull market, the price is sliding 9-period EMA. A 20 period EMA serves as a stronger support level and when this is broken down, the ETF happens to be in a bear market.
- When the ETF is in the bear market, the 9-period EMA serves as a resistance level and if there is an attempt to break it up, the 9-period EMA must cross 20-period EMA to bring the ETF into the bull market. This is the case now!
- The 50-period SMA was introduced now as I can see that it must be also pierced up if we want to make sure that current BREAKOUT is not a FAKEOUT. The price has closed just below this level. Thus, it may need some more adjustment retracing back toward 20 EMA before it goes up again.
Note, this model has been working due to dynamic and volatile nature of the industry. Once the marijuana stocks stabilize, these moving averages stop working and others will become the functional support and resistance levels.
There are many other good marijuana stocks that are not part of HMMJ ETF and may explode in future, however, this is a risky game. The ETF can show you the direction and current status due to its qualitative content of holdings.
Stay disciplined and focused on the big picture! If you like this article, please share it using below buttons or any other way you wish!