Marijuana Stocks Test & Hold March 2020 Low; This Could Signal a Base

Bullish Sign if Pot Stock Market’s Base Holds

Heading into 2022, the major risks for investors were yields and interest rates. There was also some trepidation about geopolitical situations involving China and Russia. The stock market selling drove the Nasdaq and Russell 2000 into bear market territory while the S&P 500 and Dow Jones Industrial Average traded back and forth in correction territory.

The majority of stocks have fallen into correction territory except for energy and gold stocks, which have risen in the wake of the Russia/Ukraine war. Caught in the downdraft have been marijuana stocks. The selling of pot stocks in 2022 has been disappointing, especially given their previous decline in 2021.

In my view, the selling of marijuana stocks has been excessive, considering the long-term potential for the pot sector.

Since the legalization of recreational marijuana in Canada in October 2018, pot companies have worked hard at streamlining their operations, raising capital, and moving toward positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

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At this point, pot stocks cannot seem to gain any traction following upside moves. There’s minimal technical support as the marijuana sector continues to be subject to weak relative strength.

Massive Upside for ETFMG Alternative Harvest ETF

A look at the broader pot stock market via the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) reflects the current lack of technical strength and buying momentum.

The ETFMG Alternative Harvest ETF is a broad measure of performance in the marijuana sector. The ETF holds the biggest pot stocks in Canada and the U.S., including Aurora Cannabis Inc (NASDAQ:ACB), Canopy Growth Corp (NASDAQ:CGC), Cronos Group Inc (NASDAQ:CRON), and Tilray Inc (NASDAQ:TLRY).

For investors who want to play the pot sector but don’t want to select individual stocks, the ETFMG Alternative Harvest ETF might be appropriate.

A look at the following chart shows a retest of the ETF’s March 2020 low of $8.81. The ETFMG Alternative Harvest ETF held at that price after declining to $8.80 on February 24 and increasing to $8.82 on March 4. This level could prove to be a base.

Chart courtesy of StockCharts.com 

We need to see some oversold buying support emerge for ETFMG Alternative Harvest ETF to hold at $8.80. Otherwise, the ETF could take out new lows.

The ETF’s relative strength hasn’t been bullish since February 2021; it has drifted between oversold and neutral since then. Unless the relative strength moves higher and holds at 70, I don’t see the ETFMG Alternative Harvest ETF holding on to any upside moves.

So far in 2022, the ETF has managed to test the minor $10.00 resistance level and take a shot at $11.00 before faltering back to its low. I view $10.00 and $11.00–$12.00 as the immediate targets.

For the ETFMG Alternative Harvest ETF to move higher, a base needs to form. The upside potential is huge, with further resistance at $13.00, followed by the horizontal Fibonacci retracement lines at $15.26, $17.30, and $19.34.

Chart courtesy of StockCharts.com 

Analyst Take

While the inability of marijuana stocks to attract sustained buying support has been frustrating, I remain positive for the long term. I expect the volatility to continue in the immediate term.

I view the weakness in the pot stock market as a contrarian opportunity. Investors might want to add marijuana stocks to their portfolios in small tranches to assess the buying support. The ETFMG Alternative Harvest ETF is a diversified trade on this.