APH Stock: One to Suggest, Two to Confirm
Marijuana legalization in Canada is looming. This landmark event will mark the birth of the legal recreational marijuana market in Canada.
This lucrative new segment of the economy is expected to generate billions of dollars in revenues, and it is creating a lot of buzz with investors.
The enthusiasm for the legal marijuana sector has been longstanding, and anyone who got into this sector in the beginning of 2017 was very pleased by year-end. For instance, Aphria Inc (OTCMKTS:APHQF, TSE:APH) stock appreciated to the tune of 232.7% in 2017.
2018, on the other hand, has not been so kind to investors. Year-to-date, Aphria stock is down 35.9% as a fierce correction has gripped APH stock and its peers.
Many investors are looking at cannabis legalization as a catalyst that will either make them money or make them whole on their marijuana investments.
A catalyst that is public knowledge by definition creates an environment where buying on rumor and selling on news is the appropriate action.
If this is indeed what is going to play out, it suggests that the sector will begin to climb as the event approaches. Once legalization is in place, a sell-off will follow.
I chose to focus on Aphria stock because there are already indications suggesting that the run-up to this event is now occurring.
This indication is highlighted on the following APH stock chart.
Chart courtesy of StockCharts.com
This APH stock chart captures the correction that began in January 2018.
This correction was characterized by a progressing move toward lower prices, depicting a classic bearish trend. A bearish trend is simply price action consisting of a sequence of lower highs and lower lows.
The downtrend line highlighted on the Aphria stock chart was used to capture the bearish trend. This downtrend line was created by connecting the peaks on the price chart that were produced by the price action.
The function of this downtrend line is to pinpoint where price resistance resides. The assumption suggested by this downtrend line is that, as long as the Aphria stock price is trading below the line, the bearish trend is intact, and lower APH stock prices are likely to prevail.
On May 8, Aphria stock broke above this downtrend line. This suggests that the correction that began in January has finally run its course, opening the door for a bullish trend to develop.
This indication is a great start, but one signal is never enough. In order to substantiate the suggestion, I need further confirmation from another indicator.
I have come to rely heavily on the momentum indicator that is highlighted on the following Aphria stock chart.
Chart courtesy of StockCharts.com
The indicator highlighted on the APH stock chart is the moving average convergence/divergence (MACD) indicator.
MACD is a simple yet effective trend-following momentum indicator that uses the crossing of a signal line in order to determine whether bullish or bearish momentum is influencing the price action in a stock.
Bullish momentum implies that a stock is geared toward higher prices, increasing the odds that it will advance. Bearish momentum implies that a stock is geared toward lower prices, increasing the odds that it will decline.
Momentum is a very powerful force, and the MACD indicator provides very pertinent information because a stock cannot sustain a move in either direction unless the applicable level of momentum is supporting the move.
Last year, a sustained move toward higher prices only came to fruition after a bullish MACD signal was generated in September.
While the MACD indicator was in bullish alignment, Aphria appreciated by 286.7%. In turn, when the bearish MACD signal was generated in February, it reaffirmed that a correction was in play. Since then, lower prices have prevailed.
In order to confirm that a sustained move toward higher prices is in development, a bullish MACD signal is needed. The signal lines that create this signal are currently converging, and a bullish cross can be generated in the weeks ahead.
Once a bullish cross is generated, I will have the necessary indications to suggest that a move toward higher APH stock prices is in development.
There are indications suggesting that Aphria stock is set to make a move toward higher prices. In order to confirm this notion, I need APH stock to generate a much-needed bullish MACD signal.