POT-ential Trade Setups In The Marijuana Space

JC Parets
January 13, 2020

From the desk of Tom Bruni @BruniCharting

The dash to trash is a big theme in the first two weeks of 2020, with names like Beyond Meat (BYND) and other beaten-down IPOs from the last year catching a bid and working their way higher.

We've been focusing a lot on the Marijuana sector over the last month because the ETF and many individual names are at levels where it would be logical for a reversal higher to begin.

Today we want to reiterate that potential and highlight two of the largest stocks in the space that are both liquid and offering a skewed reward/risk at current levels.

Here's the Horizons Medical Marijuana Life Sciences ETF (HMMJ), which we use as a proxy for the space, right back down to its post-ipo lows. Momentum is diverging positively and sellers can't seem to hold the recent marginal lows in price, so our thesis is that as long as prices are above 8.00 on a closing basis then it's worth a shot on the long side.

Click on chart to enlarge view.

Getting into the individual setups, we've got Innovative Industrial Properties Inc. (IIPR) which was one of our favorite names until July when our upside objective was reached within an extended accelerated uptrend. After six months of correcting, prices now appear to be emerging from a multi-month base as momentum improves.

From a risk management perspective, as long as prices are above 81 on a closing basis, then we can be long with a target back up near the former highs of 122. We've also got about 2 months until earnings become a factor here, which is helpful.

The Scotts Miracle-Gro Company (SMG) is also set up on the long side, albeit in a much more constructive fashion. The stock has spent the last two years building out a base and is now pressing up against all-time highs again.

The trigger here would be a close above 110 which would signal to us that the stock is ready to begin its next leg higher, with an initial target of 142. The stock does report earnings in 2 weeks (January 29th), so be conscious of that as we don't have any edge into these events, but the price and momentum improvements as of late suggest a breakout is likely coming.

Neither of these is a pure-play on the Marijuana industry in that they actually grow or distribute it, but they're supportive of the industry by providing products and services needed for it to operate. Additionally, they're both traded in the US and have sufficient trading volumes to support trading in them. From an institutional perspective, this is where they're gonna be if they want to play in this sandbox at all. Most don't, but those that do need liquidity and these two stocks have it.

Keep an eye on the Marijuana industry in the coming weeks and months. It's likely to be choppy, reversals are rarely clean at first, but if this dash to trash continues then we'll likely see this space catch a bid.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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