From the desk of Steve Strazza @sstrazza and Grant Hawkridge @granthawkridge
Marijuana stocks have been smoking hot over the trailing quarter, with the Alternative Harvest Marijuana ETF $MJ more than doubling since the election on November 3rd.
Considering this new leadership role over the near-term, today we're going to do a follow-up on our last deep dive into the space, which we published last fall.
Back then, we were simply looking for a bottom and mean reversion move higher, which we got... Now, with the industry making new highs, we want to see how things are looking on both an absolute and relative basis.
And as always, we'll check in on some of our past trades in the space and highlight today's strongest stocks, along with trade setups skewed in our favor that we want to use to express our bullish thesis.
Before we get into the weeds, let’s start at the industry level with the Alternative Harvest ETF (MJ).
As we discussed in a note at the time, price bottomed and turned higher late last year. In the just about three months since, the ETF has gone from trading just above 52-week lows to fresh 52-week highs... In fact, MJ is currently trading at its highest level in about 18 months.
The strength of this rally is illustrated well by not just one, but TWO breakaway gaps since the start of the year.
Having price resolve to the upside from a nice rounding bottom reversal pattern is bullish in and of itself... To see it GAP 10% higher out of the same pattern only gives us that much more conviction that this breakout is the real deal and this is an Industry we want to get behind.
Some other characteristics that are supportive of the new highs in MJ are the relentlessly strong momentum of late (printing one overbought reading after the next), as well as the notable ramp up in volume as the stock broke to the upside (not shown).
On a relative basis, MJ has also broken out above a critical level and just closed out the week at new 52-week highs relative to the Russell 3000 $IWV.
Momentum recently moved into a bullish regime and confirmed the breakout with another overbought reading.
Despite all the hype around it, the Cannabis Industry has actually lagged the broader market for years... forever, really - as it hasn't even been around for more than a decade.
Are we finally about to see pot stocks become the leaders they were puffed up to be, or does this mean-reversion rally soon go up in smoke...?
See what I did there?
With MJ having successfully reclaimed two key levels of resistance with confirmation in the form of new relative highs, bullish candlestick patterns, and strong momentum, it has just about all the characteristics of a bearish-to-bullish trend reversal.
We are long MJ above 22 with a target of 31 over the next 2-4 months.
While things at the industry level may look good on an absolute basis, we still want to see a little more progress on a relative basis. As a result of this, we want to remain very selective in this space and only own those names showing relative strength in addition to offering a favorable risk/reward.
Let's dive into some setups.
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