From the desk of Tom Bruni @BruniCharting
We haven't taken a look at the Marijuana sector in a while, so today I'm going to review where the sector stands on an absolute and relative basis...and which stocks we're buying (if any).
Normally I'd have a pun or two here, but I've decided to take the high road and focus solely on the charts this time.
First, let's start at the index level with the Alternative Harvest ETF (MJ). prices gapped below our price objective at 12.60 earlier in the year, consolidated for two months, and then gapped back above it...forming an "island reversal" bottom on the weekly chart.
Click on chart to enlarge view.
Since then, prices have successfully retested support multiple times, so it would appear the bias is higher towards 22 as long as we're above 12.60.
On a relative basis, this thing is sitting down near all-time lows relative to the S&P 500. Momentum is diverging positively, but I think it's going to be tough for the entire space to begin outperforming.
Upon analyzing the charts of the ETF's individual components, we come to a similar conclusion. Things at the ETF level may look okay on an absolute basis, but there's still a lot of weak stocks under the surface.
As a result, we want to remain very selective in this space and only own those showing relative strength and absolute price momentum.
Names like Scotts Miracle-Gro, which is a favorite of ours pretty much anytime we discuss the Marijuana space. I mean, how many of these names have hit all-time highs recently? Not many.
As long as prices are above support at 125, the bias is higher towards 193.
And on a relative basis, it's consolidating currently but remains in a clear uptrend versus the rest of the space.
These are the types of names we want to be focused on. In the event that our rotation thesis is wrong and the sector rolls over again, we can minimize our downside by owning the strongest stocks.
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