After a decline of 88% from high to low, it is clear that Aurora Cannabis (NYSE:ACB) stock makes for a better trading vehicle than an investment so far. This doesn’t mean that eventually it won’t be successful, but for now the bulls are against the ropes.
It is not alone — Canopy Growth (NYSE:CGC), for example, is also down almost 70% from its highs. But when a stock shows so much promise as ACB stock did on the way up, only to fail to under $2 per share, it’s rarely a great sign of future prospects. Nevertheless, the long term thesis for Aurora remains about the same.
The cannabis stock trade in general started out as a speculative bet, and it remains so now. ACB stock’s long-term success still depends on the same parameters.
First, it needs cannabis applications to develop across several verticals so that the stocks can grow into their valuations. For that to happen they also need to expand their capacity, since they can’t deliver what they can’t produce.
Second, they need to rekindle the headline momentum from the legislative front. That catalyst is almost dead. This is where perception is more important than reality. It doesn’t matter what is actually fact, what matters to the stocks now is what Wall Street believes is true. Currently, there are very few headlines about the U.S. federal legalization push for pot. It is understandably hard for the industry to gain momentum while it remains illegal.
Moreover, the revenues for the states have not panned out to be as fruitful as the proposals suggested. This is exacerbated by the fact that it is still cheaper to buy and deal pot in the gray market, so there is high incentive for dispensaries to remain off the government books even in legal states. So it is easy to see why Aurora stock is mired in a hideous downtrend and cannot dig itself out from the hole.
Aurora Stock Remains a Great trading Vehicle
But even while Aurora gathers its strength, it makes for a great trading vehicle. These are opportunities for the active traders, not to those who believe in its ultimate comeback.
But since it is this close to zero, it is almost like trading options but without the time element. Yes, it could go to zero, but it’s cheap enough that the absolute total loss is finite and acceptable. The important thing is to keep the bets at the proper size for a highly speculative trades. The total loss should not break the piggy bank or the trader’s heart.
It is also important to not average down in these stocks because of their speculative nature.
For trading purposes it is crucial to first define the time frame. The faster the holding period, the lower the time frame on the charts.
For example on the 30-minute chart, the triggers are $2 per share on the upside and $1.84 for support. A breach of either those two lines would bring some momentum in that direction. On Jan. 16, ACB stock failed at $2.32, so that would make for a great upside trigger. If the bulls can break out from and hold it as support, then they could really incite interest.
This would even help the long-term investors in their quest of capturing some momentum before the next uncertain earnings event.
Hope May Be Lurking Below Current Levels
Conversely, if Aurora falls back below $1.84, then the progress would be lost and the bears would send it back to wallow near $1.60 once more. So at this point and from a big-picture perspective, there is something to be said about betting on the company’s survival.
For what it’s worth, ACB stock is trading just above the limits of the weekly candle from October 2016. Back then, this marked the start of the massive 1,000% rally that took it to $12 per share.
Now, I am not saying that this is what will happen here. The point is that it’s a long-term pivot zone, and those usually provide support on the way down. So the bulls can almost feel some certainty knowing that there could be support below so they can make progress above. Recovery rallies are built on strong bases.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
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January 29, 2020 at 12:42AM
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Aurora Stock Remains a Great Trading Vehicle - Investorplace.com
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