Aphria Stock: Patience Is Warranted
Marijuana companies and marijuana stocks, have been a hot topic for a number of years now. The fateful day is is fast approaching when the Canadian government legalizes pot on a federal level. With this move, Canada is establishing a recreational marijuana sector.
Speculation is running rampant, and there is little doubt that retail investors are now involved in this sector.
Retail investors are an emotional bunch, and they are known to chase performance both upward and downward, by buying into strength and selling into weakness. This results in trading action that is characterized with wild swings in both directions, which is exactly what the marijuana sector, including Aphria Inc (OTCMKTS:APHQF, TSE:APH), stock is currently experiencing.
Aphria stock was a stellar performer last year, tacking on a 484.4% gain over a span of six months. This huge move to the upside was followed by a painful move to the downside that began in late January 2018, when 53% of the company’s value was shed in eight weeks.
As a technical analyst who uses a company’s stock chart to determine where its stock price is heading next, I can honestly say that the current correction in APH stock and the entire marijuana stock sector has been as expected.
These expectations stemmed from a number of technical indications that were suggesting that lower prices were on the horizon. I am watching these same indications, waiting for them to suggest that higher stock prices are likely to prevail.
The indications I speak of are highlighted on the following Aphria stock chart.
Chart courtesy of StockCharts.com
The indicators highlighted on this stock chart are a downtrend line and the moving average convergence/divergence (MACD) indicator.
The downtrend line was created by connecting the peaks that began in late January as the rally in Aphria stock began to stall. This downtrend line is acting as level of price resistance and, in order to suggest that higher prices are once again in development, APH stock needs to break above this level of price resistance.
I have the inclination to believe that this downtrend line is about to be put to a test because the MACD indicator is on the verge of generating a bullish signal.
MACD is a trend-following indicator that distinguishes between bullish and bearish momentum using the crossing of a signal line. Bullish momentum suggests that an investment is set for higher prices, while bearish momentum suggests that an investment is set for lower prices.
Momentum is very influential because a stock cannot sustain a move in either direction unless the applicable momentum supports it, and APH stock is perfect example of this.
The bullish run toward higher prices was supported by a bullish MACD cross that was created on November 6, 2017. Only when a bearish MACD cross was created on January 12, 2018 did lower prices, via a correction, finally set in.
Since January 12, this indicator has been in bearish alignment, and a correction continues to run its course. I am waiting for a bullish MACD cross because it would suggest that Aphria stock is again geared toward higher prices and that, therefore, higher stock prices would likely prevail.
I am hopeful that such a scenario is going to play out because the MACD signal lines are converging and a bullish signal can be created in the days ahead.
If a bullish MACD cross is created, I would speculate that the downtrend line, which currently resides around $16.00, is a price point that would likely get tested.
On the other hand, a failure to stage a price advance would put the following levels of long-term price support into play.
Chart courtesy of StockCharts.com
This Aphria stock chart has been annotated to include two very important levels of price support.
The first level has been defined by using an uptrend line. This uptrend line was created by connecting the sequence of higher lows, which have defined the bullish trend in APH stock since 2016. Using the uptrend line is quite simple and, as long as Aphria stock is trading above it, I can only assume that a bull market is still in development and that, therefore, higher prices will prevail over time.
The second level of price support is the 200-day moving average, and this metric acts as a dividing line that separates bullish stocks from bearish ones. Using the 200-day moving average is just as simple as the uptrend line and, as long as the stock price is above the 200-day moving average, APH stock is in a bullish state, and therefore, bullish repercussions will follow.
Both of these metrics currently coincide around one price point, suggesting that there is very strong support residing just below the $10.00 mark, which is where I believe Aphria stock will find support if the current trend continues.
Aphria stock and its peers are caught in a downdraft right now. I am watching a number of technical indications that I believe will suggest that this correction has finally run its course and that higher prices will prevail. Until these indications are generated, however, lower APH stock prices are likely to continue.