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Chart Advisor: Pot Stocks Burn Shorts

Posted September 1, 2023 at 2:40 am

By J.C. Parets & All Star Charts

1/ Pot Stocks Burn Shorts

2/ Big Tech vs. Everything Else

3/ Can Buyers Crack Supply?

4/ The 5-Year T-Note Lays Low

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Pot Stocks Burn Shorts

With two straight days of massive gains, cannabis stocks are on pace to book one of their best weekly performances of all time. Pot stock bulls would tell you that the space was long overdue for a move higher, but the chart has been trending steadily lower for two and a half years now.

As regulators contemplate rescheduling marijuana away from a substance that is deemed to have “no medical use,” investors are cheering the news in anticipation of heightened demand for the entire industry.

We’ve seen headlines drive prices higher for cannabis stocks many times over the past few years, but these news and events have never triggered any real follow-through. Today and yesterday already feel a little different, as we can point to technical developments on the chart that suggest this could be the start of a true trend reversal.

The first characteristic of a potential trend reversal is the trendline break. You can’t reverse course without it. Today, the ETFMG Alternative Harvest ETF (MJ) surged above its downtrend line from the 2021 highs. Momentum also triggered an overbought reading for the first time since Q1 2021. This all speaks to a change in character for cannabis stocks.

2/ Big Tech vs. Everything Else

Tech and growth stocks are not only hitting overhead supply in absolute terms, but the relative trends also suggest that their recent outperformance might pause for a while.

Below is the Nasdaq 100 (QQQ) relative to the Russell 3000 (IWV):

As you can see, this ratio is pressing against a shelf of former highs. Buyers are working on absorbing all the overhead supply at this critical resistance level. If and when they do, tech stocks will likely kick off the next leg higher on absolute terms, too.

3/ Can Buyers Crack Supply?

Commodities are chipping away at overhead supply. And no chart captures the growing demand for raw materials quite like crude oil

Check out crude oil futures forming a multi-month base below a critical resistance level:

Buyers have challenged this supply zone four times since last November, with a failed breakout marking the most recent attempt.

Interestingly, bullish momentum continues to improve following a recent overbought reading.

We imagine that interest rates and inflation could be on the rise if and when buyers decisively crack crude oil’s resistance. This would likely lead to more breakouts across the commodity space and renewed woes for bonds.

4/ The 5-Year T-Note Lays Low

Crude oil prices at $100?

Perhaps. But falling bond prices would likely accompany a rally in black gold.

Notice that 5-year Treasury note futures construct a mirror image of the crude oil chart:

Multiple attempts to absorb supply in crude coincided with multiple attempts to overwhelm demand in the 5-year T-note.

Who’s got it right? 

It’s tough to say, but we doubt that these two markets will resolve in the same direction.

U.S. Treasuries appear increasingly vulnerable—regardless of the intermarket landscape. While the 14-day relative strength index (RSI) reached its highest level in almost six months, the 5-year can’t seem to get off the mat.

Originally posted 31st August 2023

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