APH Stock: The Line in the Sand
It was a wild week for Aphria Inc (TSE:APH, CVE:APH) stock, and its marijuana stock counterparts, after news of marijuana legalization finally hit the wires.
In a matter of 10 trading days, Aphria stock went from a low of $6.72 to a high of $8.77, and back down to $6.67, where it currently sits. APH stock performed a full roundabout, ending exactly where it began.
The “buy on rumor, sell on news” event surrounding the marijuana sector has now come and gone, and marijuana is now slated to become legal in Canada on July 1, 2018.
I have stated on many occasions that my beliefs centered around this sector are that, once the news surrounding marijuana legalization hits the market, it will cause the speculative hot money that was flowing into this sector to head for the exits. This was the catalyst that caused all the volatility over the past couple of weeks.
My beliefs come second to the indications that are produced on a company’s price chart. To clarify for anyone who hasn’t read any of my previous publications, I generate my views on a potential investment by analyzing the company’s price chart. This method of investment analysis has a name, and it goes by technical analysis.
The technical analysis method is based on the notion that historical price and volume data can be used to discern a trend and forecast future prices. This may sound like a silly notion, but I have found great success by applying this method of analysis to my trading strategies.
My beliefs state that a further correction is set to ensue, but there are a couple of levels of price support that still stand. Trading above these levels of price support suggests that the bull market is still intact.
The following Aphria stock chart illustrates the first level of price support.
Chart courtesy of StockCharts.com
The APH stock chart above illustrates the constructive price action that has been a consistent theme throughout this bullish run that encompassed the entire marijuana sector.
The blue trend line on the above chart was a former level of price resistance. Breaking above this trend line on April 4 suggested that higher Aphria shares prices were a likely endeavor. This event is highlighted on the price chart above as a “breakout.” This breakout correctly assumed that higher prices were likely and, in a matter of days, Aphria stock surged by 27%, creating a new all-time high in the process.
This surge in price was short-lived, and Aphria shares are currently testing price support. Support is the same trend line that acted as resistance but, now that this level has been conquered, it becomes a new level of price support. Testing this level from above is referred to as a “backtest,” and this price action is not uncommon.
As long as the share price remains above this level of price support, I can only assume that the bullish implications that were suggested on April 4 are still in play. This is against my beliefs but, like I said earlier, the indication on the price chart trumps any beliefs that I may be holding.
The following Aphria stock chart illustrates the accelerated bullish trend that began in the summer of last year, which is providing the second level of price support.
Chart courtesy of StockCharts.com
The bullish trend in APH stock began to accelerate in the summer of last year as speculation surrounding legalization began to grow. This acceleration in price contained the quintessential characteristic of a bullish trend. It’s a trend that contains higher highs and higher lows, which begins in the lower left of the price chart and ends at the upper right of the price chart.
Capturing this bullish trend is easily done by using a simple uptrend line. Once the trend line is plotted on the troughs on the price chart, the magic is created.
The magic that is created is that this trend line has been tested on numerous occasions and, every time selling pressure has mounted, buyers have stepped in to support this uptrend line. This uptrend line now defines whether Aphria shares are trading within a bull market or not, and it has become the line in the sand.
As long as APH shares are trading above this uptrend line, I can only assume that the bull market is intact. Trading below it would indicate that the bull market has finally concluded and a larger correction is set to ensue.
The moving average converge/divergence (MACD) indicator in the lower panel of the above chart has been instrumental in identifying whether an advance or decline was set to occur. MACD is a simple, yet effective trend-following momentum indicator that uses signal-line crossings to distinguish between bullish and bearish momentum.
There have been four bearish MACD crosses since the price peaked in November of last year, and all the selling pressure that was created quickly abated after support outlined by the uptrend line was met. The MACD indicator is currently bearish, which does support lower prices, but, until Aphria shares break below support, I cannot hold a bearish view on this investment.
Bottom Line on Aphria Stock
The “buy on rumor, sell on news” event has transpired in the marijuana stock sector, and a sell-off has commenced. At this current juncture, Aphria stock is still trading above key levels of price support and, as long as APH stock remains above these levels, I can only assume that the bull market is still intact. Trading below price support will justify my beliefs and suggest that a larger sell-off is set to ensue.