KERN - Reversal Pattern

KERN is the the latest Cannabis company to go public. It just made its debut on the NASDAQ about a month ago.

I think a great way to invest in the Cannabis markets is through the ancillary companies. It is what I call Levi Strauss model. Mr. Strauss was an unsuccessful Gold Miner who realized that it is better to sell things, like jeans, to miners than to be a miner. Very few miners were successful, but regardless of whether or not a miner had success, they still needed to buy things like picks, shovels and jeans. The idea is to not be a miner. It is to be the person who sells things to the miners.

KERN is an ancillary company to the Cannabis industry. It makes compliance software, and whether a cannabis company is successful or not, they will still need this type of software.

Because it is such a newly publicly traded company, I have not yet had sufficient time to study the fundamentals. I am not ready to make an informed opinion on KERNs future prospects. But as a veteran trader, I saw an obvious lesson and that is what I wanted to talk about. This is the reversal day that recently occurred.

In markets prices are always doing of of 3 things. They are going up. going down, or staying the same. When prices are rising the forces of demand are in control. When prices are going lower the forces of supply are in control. When markets are trading sideways or are flat, the forces of supply and demand are equalized,

A Reversal Day or Reversal Pattern illustrates the changing of leadership. In the case of KERN, we had a classic reversal day on June 20th. The stock has lost about 50% of its value since then.

The first chart is KERN on June 20th. In the morning the forces of supply were clearly in control. The stock opened $10 higher than the previous days close and by noon it was trading above $70. Then around 1:30 PM the demand dried up, and the forces of supply took over. They drove the stock price back down below where it opened and it closed near the lows of the day.

It also closed below the previous days closing price. This is an important part of a reversal day because it shows that the trend is changing. If had closed above the previous close then it would still be in an uptrend.

Next we have a one month chart of KERN for a broader perspective. I like to use Candlesticks on my charts because I think it is easier to see patterns like we have here. Each day is considered a candle. If the stock closes above the opening price it is blue. The bottom of the candle is the opening price and the top of the candle is the close. If the stock closes below the opening price, it is red with the top being the opening price and the bottom of the candle the close. The highs and lows of the day, as opposed to the open and close, are shown by the little lines that are above and below the candles which are known as ‘wicks.’

With some practice different types of patterns can be easily recognized. There are numerous candle stick patterns and formations that have names. The two day pattern that formed over June 19th and 20th is called a ‘Dark Cloud Cover”. This is considered a bearish reversal pattern. It certainly was in this case.

It really isn’t important to know what these names are. What is important is to be able to understand what they are illustrating. In this case we can see that in the week leading up to June 20 the buyers were in control. On each day the closing price was higher than the opening price, Then on June 20th the buyers ran out of steam. Around midday the sellers took over and have been driving it lower since.

Being able to recognize reversal patterns is not difficult if you understand the dynamics that are being illustrated. The action recent action in KERN can teach you a valuable lesson.