Profiting From Supply and Demand Dynamics

Canopy Growth Corp (TSE:WEED) grows and sells cannabis.

This chart illustrates a dynamic of trading that investors and traders should understand. When markets get to important support and are oversold they trend to rebound.

We can see here that there is support around the $55 level. The last two times the stock reached that price, it was oversold and rebounded.

What does ‘oversold’ mean? It refers to momentum. Momentum is simply defined as how far away a stock is today from a price X many days ago. For example, if a stock trades at exactly $20 for five days in a row there will be neutral momentum. If it trades at $20 for 4 days and on day 5 it trades at $18, then it will have momentum.

‘Oversold’ or ‘overbought’ are terms traders use when momentum indicators are at extremes.

WEED is once again testing the $55 level. However, this time it’s different. It is not oversold. Momentum is neutral. This illustrates a second dynamic of trading. When stocks get to support levels and momentum is neutral, they have a much better chance of breaking the level than if they are oversold.

Watch out on this one. If $55 breaks WEED could make a big move lower because there is no clear support between the current levels and the levels around $40.

Trulieve Cannabis Corporation (TSY:TCNNF) provides medical cannabis products.

Here we see a classic ‘Head & Shoulders’ pattern playing out just as predicted. Like most things in technical analysis, this pattern is widely misunderstood.

It is important to understand that you can’t just mindlessly look for patterns and be successful. You need to understand the supply and demand dynamics that these patterns are illustrating.

A ‘Head & Shoulders’ is a Reversal Pattern. This means that it can only come at the end of a meaningful uptrend or downtrend. If an analyst claims to see a H&S when the market is trading sideways or a H&S pattern as a continuation of the trend or if, they are wrong. At least by a traditional definition.

Here we have a perfect H&S. The left shoulder formed after the stock doubled in two months. This is clearly a trend.

In a H&S, the Left Shoulder illustrates the ‘smart money’ starting to sell. After the stock falls and rallies back, the ‘smart money’ completes their selling during the Head. The most amount of volume usually happens in the Head, like we see here.

At this point there is only minimal buy interest. There is one last gasp on lower volume during the Right Shoulder before he price falls dramatically due to the lack of buyers.

The Neckline is now broken so there is a good chance we will see TCNNF continue to go lower. The target price is traditionally the distance between the Head and Neckline subtracted from the Neckline. This would be around the $8 level.

Tilray Inc. (NASDAQ:TLRY) researches, grows, and sells cannabis.

Tilray clearly illustrates the concept of a trend. Unfortunately for TLRY shareholders, it has been a downtrend. As we can see here, since September the forces of supply have clearly been in control. The stock has fallen about 70% since then.

I recently saw a well know technical analyst say that trendlines are not meaningful or predictive. This analyst is clueless. As someone who has traded at two of the top hedge funds in the country I can tell you with absolute certainty that successful traders utilize trendlines.

Trends and trendlines are not complicated and they can be tremendously helpful. Of course, it is an art and not a science but with some practice and an understanding of just what it is that you are looking at, they will help you profit.

In markets prices are always going up, down, or staying the same. When they are going up the forces of demand are in control. When they are going lower the forces of supply are in control. When they are trading sideways the forces of demand and supply are equal.

Trendlines are simply graphical illustrations of these dynamics. When a trendline is broken, the forces of supply and demand are equalizing. This could be an early indication that control of the market is shifting and that the trend is about to reverse.

HEXO Corp. (NYSE:HEXO) grows and sells medical marijuana. Here we have a situation that may be a setup for a possible low-risk trade.

As we discussed, when stocks are oversold and get to levels that were prior support there is a good chance they could make a meaningful rebound. We could be seeing that dynamic here.

HEXO is extremely oversold. In fact, the last two times that it was this oversold, in October and December of last year, a significant rally followed.

The $5 level was support from January through March. HEXO is approaching this level once again.

So here we have a situation where an extremely oversold stock is approaching a clear support level. There is a good chance that it may rally off of this level again. This is on my radar screen for a possible trade.

Cannabix Technologies Inc. (OTCMKTS:BLOZF) develops and manufactures marijuana breathalyzers for the police.

You can see that the 80 cent level has been support for BLOZF. It was support in December and then again from early May through last week when it rallied off of the level.

If it keeps rallying there will probably be resistance around the $1 level. In addition to being important psychologically it was support through March and April.

Why would a prior support level become a resistance level? Consider the following:

Those who bought it at $1 are now underwater. They tell themselves that if the stock gets back to that level, they will sell it to get out even.

Those who sold part of their positions before BLOZF fell think that they should have sold more. They tell themselves that if it gets back to $1 they will sell additional shares.

Professional traders see a clearly defined level and get into the market to take advantage of it.

We can see now that there will be three groups of different types of investors who are interested in selling the stock at the $1 level. That is how resistance levels form.

CannTrust Holdings Inc (NYSE:CTST) produces and sells medical cannabis. It focuses one developing nanotechnology to create new products for the medical, wellness, and pet markets. There could be a lesson here on how the enter a trade.

Clearly the $4.80 level is important support. You don’t need to be a market Guru to see that. Because of this investors may be interested in buying it around $4.80 because the last three times that it traded to this level a rally followed.

Many investors get hurt because they don’t think about how to enter the trade. They try to catch the exact bottom and lose money if it keeps going lower. This is essentially just guessing.

A potentially better way to enter the trade is to wait until the downtrend line is broken and to buy it on the way up. This will help protect you if the level breaks and the price drops. You wont catch the exact bottom but the risk reward ratio will be better than if you just guess.

Cronos Group Inc (NASDAQ:CRON) produces and sells cannabis in Canada and Germany. The action in CRON illustrates how a resistance level becomes a support level.

In September and December the $14 level was clear resistance. Then in May and June it became clear support. How does this happen?

Consider the following:

Those who went short at $14 were feeling pretty good when the stock went lower and they were looking at profits. But then it rallied above this level and they were now looking at losses. They tell themselves that if it gets back to $14 they will buy it to get out even.

Those who sold their long shares at $14 feel that they made a mistake after the shares trade higher. They tell themselves that if it gets back to that level they will buy their shares back because they will trade higher again.

Add to that the professional traders who are going to try to take advantage of clearly defined levels will be buyers as well.

Now we can see that there are three groups of interested buyers at the $14 level. This is how support develops.