APH Stock: Eyeing the Chart
Aphria Inc (CVE:APH) stock has performed extremely well in 2016, up 300%. This performance was driven by investors who were fortunate to understand that, when the Canadian government announced on April 20, 2016 that they were going to pave the way to legalize marijuana and create a recreational market, the licensed marijuana producers were set to be one of the many beneficiaries.
The legislation would set the wheels in motion that would expand the consumer base of these producers, outside the scope of medical marijuana patients. For companies such as this who are struggling to produce a profit, this new consumer base could push them into the black and reignite their earnings potential.
This rhetoric is also the basis that has caused some fever to spread to this sector, and some sort of top in price was created in mid-November as volatility and volume reached extremes.
Whether this top is a long-term top has yet to be seen, and I have mentioned in previous reports on APH stock that, as long as the price remains constructive, then the trend toward higher prices is still possible.
The following stock chart illustrates the constructive price action in Aphria stock.
Chart courtesy of StockCharts.com
In late summer when the sector started to heat up, APH stock began to trade within the confines of an ascending channel. An ascending channel has two parallel trend lines that define the upper and lower bounds. The share price oscillates between these two lines for as long as time permits.
In November, APH stock temporarily breached the upper level of resistance outlined by the ascending channel. Aphria stock proceeded to quickly trade back below resistance and tested support in one fell swoop. This price action is suggesting that the break above resistance was not warranted, and the violent reaction in price supports this notion.
The channel defines the bull market in APH stock and, as long as Aphria stock remains within this channel, the price remains constructive and the trend toward higher prices can continue. This trend toward higher prices is also supported by the 50-day moving average. This moving average is the dividing line between a stock trading with healthy or unhealthy momentum. APH stock is currently trading above this moving average, indicating that the trend higher is still healthy.
The top panel on the chart above labeled “RSI” stands for Relative Strength Index. This oscillator is a momentum indicator that is used to measure overbought and oversold conditions. When the oscillator is above 70, it suggests that the stock is overbought. When it is below 30, it suggests that the stock is oversold.
In a bull market, it is common for the RSI indicator to remain above 50 when the price is trending higher. As long as the RSI remains above 50, the bullish trend toward higher prices remains intact.
The following Aphria stock chart illustrates the pattern that the price has developed within the confines of the ascending channel.
Chart courtesy of StockCharts.com
Healthy price action consists of impulse waves that take a stock price higher, and consolidation waves where the new higher prices are digested. Consolidation waves are essential in a healthy trend because they alleviate any overbought condition that may have developed as the stock moved higher, and are essential in setting up the impulse wave that is set to follow.
The bounce off of the November lows constitutes the impulse wave, and the price action that followed constitutes the consolidation wave. The consolidation wave illustrated in the chart above is labeled a “pennant” because it is made up of two converging trend lines.
When this pattern is completed and Aphria stock moves outside the trend lines that define it, a new impulse wave is set to develop. The new impulse wave would mirror the initial impulse wave that developed prior to the consolidation wave, and will dictate whether support or resistance defined by the ascending channel will be the next price objective.
Bottom Line on Aphria Stock
Aphria stock chart remains constructive and, as a result, the trend toward higher prices is still intact. If the price falls below the ascending channel and the 50-day moving average, I would have reason to believe that the speculative bubble in APH stock has burst and lower prices were set to prevail.