How to Spot and Monitor Trends in the Cannabis Industry

Spotting investment trends in cannabis is challenging to say the least, and a great many trends have come and gone. For example, just a couple of years ago, vape pens were all the rage. Vape pen companies started popping up everywhere and raising a great deal of capital. Then came the bad news—a number of deaths and hospitalizations were linked to vaping. As a result, the vape market contracted, and investors in vape companies pulled back.

You can find trends in cultivation, processing, brands, technology, equipment, distribution, delivery services, and all other businesses that comprise and service the cannabis industry. Frequently, these trends emerge as the regulatory landscape shifts and as new markets, new processes, and new product categories emerge.

Technical analysis of different trends

Technical analysis focuses on three basic trends:

• An uptrend or bullish trend exists when each successive high is higher than the previous high and each successive low is higher than the previous low.
• A downtrend or bearish trend exists when each successive high is lower than the previous high and each successive low is lower than the previous low.
• A sideways trend or horizontal trend shows that the highs and the lows are both in a generally sideways pattern with no clear indication of trending up or down (at least not yet).

It’s easy to see which way the cannabis stock is headed in the following figure. For a couple of months in 2017, Aurora Cannabis was a hot stock, rising in price from around $30 to nearly $140. (Note the dotted straight line. This is a trendline, which reflects the general direction in which the price of the stock is headed.)

In contrast, from March of 2019 to the same month in 2020, you can see an extreme downward trend in the price as it dropped from about $120 to less than $10 per share.

In 2020, from March to May, you can see a horizontal trend as the price fluctuated in a small range between $8 and $10 per share (see the following figure).

A sideways or horizontal trend shows a consolidation pattern, which may indicate that the stock will break out into an uptrend or downtrend.

Regardless of whether a trend is up, down, or sideways, you’ll notice that it’s rarely (closer to never) in a straight line. The line is usually jagged and bumpy because it’s really a summary of all the buyers and sellers making their trades. Some days the buyers have more impact, and some days it’s the sellers’ turn.

Technical analysts call the highs peaks and the lows troughs. In other words, if the peaks and troughs keep going up, that’s bullish. If the peaks and troughs keep going down, it’s bearish. And if the peaks and troughs are horizontal, you can expect an upturn or downturn.

Gauging a trend’s length

With trends, you’re not just looking at the direction; you’re also looking at the trend’s duration—how long it lasts. Trend durations can be (you guessed it) short-term, intermediate-term, or long-term:

• A short-term (or near-term) trend is generally less than a month.
• An intermediate-term trend is up to a quarter (three months) long.
• A long-term trend can last up to a year. And to muddy the water a bit, the long-term trend may have several trends inside it.

Trendlines

A trendline is a simple feature added to a chart—a straight line indicating the general direction in which the price of a security is traveling. It’s sort of like a piece of string stretched between point A and point B.

Trendlines indicate momentum in a certain direction and help to predict the future price of a stock. Theoretically, you can extend the trendline to see what the price is likely to be in the next hour, day, week, month, or year. However, trends also reverse based on rumors, news, and investor sentiment. As noted earlier, for example, a sideways trend often signals that a stock’s price is about to increase or decrease.

Don’t rely solely on trendlines to make investment decisions. If you were to draw a trendline on the preceding figure, it would show a steady increase in stock price over time, but given the large swings in the stock price over that time period, the stock price could soar or continue to drop.

Resistance and support in technical analysis

The concepts of resistance and support are critical to technical analysis the way tires are to cars. When the rubber meets the road, you want to know where the price is going:

• Resistance is like the proverbial glass ceiling in the market’s world of price movement. As a price keeps moving up, how high can or will it go? That’s the $64,000 question, and technical analysts watch this closely. Breaking through resistance is considered a positive sign for the price, and the expectation is definitely bullish.
• Support is the lowest point or level that a price is trading at. When the price goes down and hits this level, it’s expected to bounce back, but what happens when it goes below the support level? It’s then considered a bearish sign, and technical analysts watch closely for a potential reversal even though they expect the price to continue to drop.

Check out the channel in the following figure; it shows you how the price is range-bound between a trendline at the top that traces the highs and a channel line at the bottom that traces the lows. (A channel occurs when an asset is trading between two parallel trendlines.)

Here, the stock is zigzagging downward. Toward the end of the channel, the stock is getting more volatile as its price moves outside the original channel lines. This tells the trader/investor to be cautious and on the lookout for opportunities or pitfalls (depending on your outlook for the stock).