High-Flying Cannabis Stocks
Featuring Brian Shannon
Published on: April 5th, 2019 • Duration: 15 minutes • Asset Class: Equities • Topic: Technical Analysis, TradingBrian Shannon, CMT, founder of AlphaTrends.net, makes his “Trade Ideas” debut with a look at two stocks that he’s using to play the cannabis space: Scotts-Miracle-Gro & Aurora Cannabis. He examines the technicals, highlights the importance of the volume weighted average price indicator and discusses how to make the trades. This interview with Jake Merl was filmed on April 3, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Brian Shannon, founder of AlphaTrends.net. Brian, great to have you on the show.
BRIAN SHANNON: Glad to be here. Thanks for having me.
JAKE MERL: So viewers at home may know you from our technical trader series. But today, we're at our New York City studio doing a trade idea. But just for the folks at home that may not be familiar with your work, can you please go over your background, who you are, and what you do at AlphaTrends.net.?
BRIAN SHANNON: Yeah. So I've been in the financial industry since 1991. I started out as a retail broker, and quickly migrated over to trading as I realized I am more interested in the markets than being a salesman basically. So I founded AlphaTrends.net I think probably 12 years, 11 or 12 years ago. I actually had a calendar reminder today that it's the anniversary I think in the next day or two.
So AlphaTrends.net. is a subscription product for technical analysis. Swing trading is what I typically do. And I did find that anywheres from two days to three or four weeks generally. My work is also-- I think most people are probably familiar with it on Twitter. It's @AlphaTrends. So that and my YouTube channel.
JAKE MERL: Well, thanks so much for that background info, Brian. So getting right into it, what's your trade idea for today?
BRIAN SHANNON: OK, I've got a couple of stocks. We'll do two of them. And we're looking at the cannabis space. First idea is Scotts Miracle-Gro, not really associated typically with the weed industry. But they did announce-- I think it was probably two years ago-- that they were aggressively looking to get into being the picks and shovels for the weed industry, which is a big, diversified company here. A household name. And the stock last year really got hit hard from about 110 down to 58, I think it was. Today, it's around $80 per share. And it's looking set up technically I think to rebound back up to test those highs.
JAKE MERL: And what about the other stock you have for today?
BRIAN SHANNON: OK, the other stock is Aurora Cannabis, a much more speculative name. And that one is priced at about $9.20 right now. What I'd like to see there is-- if you look at the chart, we had a break pass some resistance at about 7 and 1/2. And that was maybe a month or so ago. So that prior resistance is now holding as support.
And when we look at the shorter term time frame, we can take a look at that move. And on that chart, with 30 minute candles, you see I have a volume weighted average price anchored from the beginning of that move. So what that tells us is the average price paid since that event. And we're holding above-- just below that right now.
And we also-- I put it anchored volume weighted average price at the high of that move. So what that tells us is that these two price levels-- the average price is kind of compressing together and acting is a little bit of resistance right now. So if the stock can get up through that-- which is at $9.30-- I think we see the next leg higher.
JAKE MERL: So let's just take a step back here. Are you bullish on the entire cannabis industry? You know, the whole sector? Or are you just looking at the technicals with these two stocks?
BRIAN SHANNON: That's a great question because there are a lot of different stocks and there are-- some of the-- Aurora is kind of a smaller one. It does trade good volume though, a little over a million shares per day. But a couple of the leading stocks in that group are the ones that people are most familiar with. For instance, Tilray-- T-I-L-R--Y-- and CGC, they've been having a little bit of trouble. Their charts are looking like they're breaking down right now.
GW Pharma is holding up nicely. But it's a little bit extended. So I think, just based on a risk reward, these two look the best right now in that industry.
JAKE MERL: And so how did you first come across these names? Were you just looking for cannabis stocks? Or do they come on a screen you run? How did you find these two stocks?
BRIAN SHANNON: Right. That's a question I get all the time is, how do you find your ideas? And I don't look for longs. I don't look for shorts. So I don't look for a specific industry.
It's a more intensive process in that I'm not telling the market what I want. Instead, I look at a lot of stocks each day and so I have my master list of stocks. And I'll review those each week to get it down to a narrower universe for that week. And if I see emerging strength or weakness in a certain stock, then I jot that down. And then when I see a couple in the same industry that are giving me kind of the same type of signal that there is emerging strength, then I'll take more note of that.
As we said though with the marijuana industry right now it's kind of interesting that we have some that are in severe downtrends really, whereas these other ones look like they've already experienced-- they're selling and ready to move higher again.
JAKE MERL: Great. So let's start out with the first name, Scotts Miracle-Gro. Can you please talk about the technicals and what you're looking at off the charts?
BRIAN SHANNON: As I said, we saw the stock drop precipitously in 2018. So, on that chart, you can see I have that purple line. That's the volume weighted average price from that high. So as that stock declined down to 58, the average price, of course, that it was transacted at, is declining as well. That volume weighted average price, since that peak, is-- right now, we're right up against it at $80 per share. And we just ran from 75 in the last week and a half.
So what I'd really like to see here is just a little bit of a pullback down towards 76, 77, and then buy strength emerging from there. I think if it does that, the recent low of about a week and a half ago, is a great place to put a stop loss. So if we have a stop at about 75 and 1/2, I think it's an incredible risk reward because we're only risking about two to three points in this stock.
It's back above the 50 and the 200 day moving average, as well. In fact, it just had a golden cross, if that means anything to anyone out there.
JAKE MERL: What is a golden cross?
BRIAN SHANNON: A golden cross is where the 50 day moving average crosses up through the 200 day moving average. People have said that that's a bullish event. I-- again, it's not something I look for. But I'll note it when I see it. To me, it's all about the risk reward.
So if it can pull back a little bit, give us a little bit better entry from this point. And then, as it begins to emerge higher-- in particular, once it takes out that 80 level that we just saw in this recent little peak-- I think it's headed probably towards its all time highs, up near about $100, $110 per share.
JAKE MERL: And do you have a time horizon for that?
BRIAN SHANNON: Scotts is more of a blue chip, stable type stock. So I think it's going to take some time for this one. Maybe six to nine months to get the full move there.
JAKE MERL: And so you mentioned volume weighted average price. What exactly does that mean?
BRIAN SHANNON: Volume weighted average price, we can go really deep in the weeds here. But I'll keep it pretty simple. Most people are familiar with dollar cost averaging. So if you put $1,000 into IBM every month, you're going to, at the end of the year, have a dollar weighted cost. That's your price that you report to the IRS. They want to know what your average cost base is.
That becomes your volume weighted average price because one month you might buy 30 shares, if you're buying $1,000 worth. Another month as the stock drops, you might buy 37 shares. And, as the stock rallies, maybe you'll only buy 22 shares. So what it's doing is taking the-- each and every transaction, and giving a dollar weighted cost average.
Most moving averages over time based. This is, again, volume weighted, right? As the name says. So it tells us-- what I like to do is put it from a specific point, such as from a breakout level, from an all time high. And it tells me the psychology of who's in control from that point in time. Whose-- are the buyers gaining control?
The volume weighted average price, I think, is the best measurement of supply and demand in the market, and who's actually in control from any specific point. I'll use it from a Federal Reserve meeting, from an earnings announcement, from an FDA report, or anything that suddenly changes the psychology of the market, that's where I like to anchor the volume weighted average price from, because then we have a way to say, here's the psychology from that point forward and who's truly in control, the buyers or sellers.
So back to Aurora, if we're below the volume weighted average price from that move higher we just saw, it saying that we're holding above key resistance on-- support on a longer term time frame. And now it's just that transitional period where buyers look like they're regaining control. So it becomes at the point where now we're in anticipation mode. We're anticipating the strength, setting alerts maybe at $9.25. Maybe some people are getting in early.
For me though it's now-- once we get above those levels, it tells me the average participant from the breakout and from the peak are now in a position of strength. So the buyers are truly objectively in control of it since that frame. So now if we can get above that peak at $9.30 per share, that puts us above those two volume weighted average price levels, and it tells us the buyers have regained control. So they should maintain that control. If not, that's what we have stop losses for.
JAKE MERL: And so what is your stop loss? And your target?
BRIAN SHANNON: OK. So at Aurora, I think that, again, buying it above $9.30 per share, the recent pullback low is about $8.30. So maybe $8.25. Just a little bit below that. So we're risking about $1, $1.05. And I think it gets up through that $9.30 level, I think it makes a pretty quick move to 12 and 1/2, which is its all time high. And we'll reassess from there if it can continue to move higher.
The goal would be then to raise stops and see what the market gives us after that. But I think 12 and 1/2 is a reasonable expectation of what it has the potential to do.
JAKE MERL: 12 and 1/2 over what time horizon?
BRIAN SHANNON: It's a speculative stock. So I'm going to be aggressive here on a time frame and say probably one to three months is all it would really take.
JAKE MERL: So what would you say are the biggest risks to both of these trades?
BRIAN SHANNON: You know, as far as fundamentals, I think that maybe if Canopy, CGC, and Tilray continue lower and really get hit hard, then I think there is industry risk that some money will come out of these names. I think Scotts though, is probably a diversified enough company that it's not so tied to the cannabis space. Aurora, however, is super speculative, as I said.
But if you look at just simple fundamentals, they've grown their quarterly revenues 200 to 325% each of the last four quarters. So when I look at fundamentals, I keep it really simple. Are they selling more stuff? Whatever that stuff is. In this case, it's stuff. And are they making more money selling whatever that is?
And, in this case, they are. So that just gives us a little bit more confidence. So, to answer your question, the biggest risk is, I think, industry risk. If the sector is weak, it will have an effect most likely on these two stocks, as well.
JAKE MERL: So before you mentioned swing trading. Are these two trades today swing trades?
BRIAN SHANNON: Great question. A time frame is something that is super important that a lot of people don't pay attention to. So I always try to make sure I represent the time frame that I'm looking at. So Aurora Cannabis is, as I mentioned, it's a speculative name. I think that's more of a swing trade candidate. Buying it above is $9.30 is pretty specific.
And, hopefully, I'll be in front of my machine watching it at that time to participate. Because I think there is the opportunity for quick move of maybe $1.5 over the next-- over a couple days. But beyond that, I think that you look out one to three months, then it's probably stretching what a traditional swing trade is, the way I define it
But Scotts is-- it's more of a steady, blue chip type company. You wouldn't know that from the way it performed last year. So I think that's going to take longer term. That's six to nine months out, so not really a swing trade.
JAKE MERL: Well, Brian, that's a lot to work with. Thanks so much for joining us.
BRIAN SHANNON: Thanks for having me on.
JAKE MERL: So Brian is bullish on two Canada stocks. Specifically, he likes buying Scotts Miracle-Gro, ticker symbol SMG, between 76 and 77, with a stop loss at 75.50, and a target of 100 to 110, over the next six to nine months.
He also likes buying Aurora Cannabis, ticker symbol ACB, above 930, with a stop loss of 825, and a target of 1250 over the next one to three months.
And that was Brian Shannon, founder of AlphaTrends.net. And for RealVision, I'm Jake Merl.