Cannabis stocks ripped higher in the third quarter of 2018, underpinned by Canada's national legalization in mid-October and Tilray, Inc.'s (TLRY) deal with the U.S. Drug Enforcement Administration to import pot for medical research. Dow component The Coca-Cola Company (KO) added to optimism at the time, talking with Vancouver-based Aurora Cannabis about a beverage containing CBD, the non-psychoactive but medically promising plant extract.

Bubble warnings were ignored during the rapid advance, encouraging a low-skilled trading crowd to jump on board, hoping for the next Amazon.com, Inc. (AMZN). Not surprisingly, pot stocks topped out quickly and turned sharply lower, trapping dumb money in a rapid decline reminiscent of the cryptocurrency plunge. Fortunately for remaining bulls, price action has improved greatly in recent weeks, raising the odds for a long-lasting bottom and fresh upside.

However, broken uptrends rarely re-inflate quickly, telling shareholders to expect modest rather than spectacular 2019 gains. Realistically, the industry won't grow rapidly until the United States legalizes pot, and that won't happen with so many politicians treating weed like heroin or cocaine. As usual with this phenomenon, local support will drive slow but steady expansion, limiting revenues until we enter a more enlightened social environment.

Technical chart showing the share price performance of Cronos Group Inc. (CRON)
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Toronto's Cronos Group Inc. (CRON) has carved the sector's most bullish pattern since posting an all-time low at $1.00 in July 2017. A healthy uptrend off that price level topped out at $11.90 in January 2018, yielding a rapid 55% decline that ended just above the 200-day exponential moving average (EMA). Three tests at the moving average into August found willing buyers while eight-month price action completed a symmetrical triangle.

The stock rallied off support in August and stalled above the prior high, easing into a rounded consolidation while accumulation readings probed all-time highs. A breakout above September resistance at $15.30 could attract widespread buying interest, yielding a fruitful period that matches the intensity of the 2017 into 2018 uptrend. That buying impulse could carry quickly into the $20s or $30s, underpinning weaker plays that have been decimated by the broken bubble.

Technical chart showing the share price performance of Tilray Inc. (TLRY)
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Tilray, Inc. (TLRY) came public in the low $20s in July 2018, ground sideways into August and took off in a vertical advance that added 275 points in six weeks before topping out at $300. It then settled into a persistent decline, carving a series of lower highs and lower lows that have dropped shares of the cannabis upstart into the double digits. The stock bounced in the mid-$60s in December and has built a small basing pattern while weekly relative strength readings lift off oversold levels.

A breakout above $82 to $84 would also mount the .618 rally retracement level, setting off a minor buying signal. A more bullish signal would erupt if the stock can remount the 50-day EMA at $90, broken in early December after six weeks of testing. It's wise to expect slow progress and a few setbacks before the stock clears this level because pullbacks to new resistance usually attract committed sellers.

Technical chart showing the share price performance of the ETFMG Alternative Harvest ETF (MJ)
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The ETFMG Alternative Harvest ETF (MJ) illustrates the opposing forces of industry optimism and pessimism, with several bubble periods embedded within relatively weak price action. The fund bottomed out in the mid-$20s in January 2017 and turned higher, breaking out above the 2016 high in January 2018. The rally peaked near $40 a few weeks later, ahead of a steep decline that found support in the mid-$20s.

A second rally wave exceeded the January high by less than six points in September before reversing in an equally ferocious decline that undercut mid-year lows by two to three points. The fund has lifted back above those broken support levels, setting off a failure-of-a-failure buying signal that should establish a trading floor in the mid-$20s. A one- to three-month basing pattern around this level would complete the bullish turnaround, raising the odds for a fresh advance. 

The Bottom Line

Cannabis stocks may have bottomed out after targeting the large supply of weak hands, setting the stage for modest 2019 upside.

Disclosure: The author held no positions in aforementioned securities at the time of publication.