The Chart Guys Founding Partner and Analyst Charting Man Dan McDermitt discusses the correlation between oil prices, the S&P500, and the cannabis space. Charting Man Dan emphasizes that from a technical perspective, oil and the S&P do the exact same thing. As a result, an oil bounce will provide a relief bounce to the S&P and the cannabis space, which is strongly correlated to the S&P. McDermitt cautions that the there’s continued weakness in the S&P, which has broken October lows and is now looking back at February lows for its next support level. He notes that the names that are holding up will perform better when the bulls finally show up. Charting Man Dan touches on the Tilray Inc (NASDAQ:TLRY) distribution deal with Novartis AG (NYSE:NVS). He looks at a chart for Cronos Group Inc (NASDAQ:CRON), points out that the company’s stock is establishing support around the $11 mark, and he anticipates a lower high forming.

Transcript:

James West: Hey, Dan, welcome back.

Charting Man Dan: Thanks for having me. Quite the intro, very nice.

James West: That’s the first time I’ve seen that, too. It’s great. Anyways, Dan, it’s awesome to see you again this week, and here we are in another down week, another bunch of red days piling up here – what do you, let’s talk about the S&P 500. What’s the story there?

Charting Man Dan: So we’re continuing to see weakness in the S&P 500, and we just broke the lows that we’ve seen at this point. We had October lows that were watching, those have broken, so now we’re looking back at February, and those in the market back in February can remember that was a time of significant fear. We had a big old dump, we ended up recovering from it, but we’re now looking back down at those support levels.

So we continue to see weakness. At this point I’m watching how oil is going to be coming into play with the market as a whole, and we’re patiently waiting for signals that the trend has shifted. But until that happens, we’re still looking for more red.

James West: Sure. How important would you say the speech of Chinese Premier Jinping is going to be?

Charting Man Dan: It’s definitely going to interact or have an impact in the short term – that’s the narrative that the market is attaching itself to right now. Of course, the Fed and the rates are going to be on the topic of discussion, but it’s China. It’s China and the US, and the trade deals, and that’s what’s the driving force, and the headlines and the Tweets, that’s what we’re seeing the biggest reactions. So that’s what the market is looking.

James West: So how’s all this affecting the cannabis sector?

Charting Man Dan: Well, as we know, if the market is weak, doesn’t really matter what news you get, we’re going to see weakness. And it’s almost like, if we could imagine the run-up into the October, or I should say, into the first day of sales in Canada, if that were happening in this market environment, we would have seen such a different run-up; it would have been very notable, and it was almost like the perfect storm in terms of the S&P 500 being at all-time highs and that run-up with Canadian MJ at all-time highs, it allowed for such significant gains, because everything was, you know, sunshine and rainbows and euphoria in the market. And had that timing lined up where we were looking to, you know, next week, the first week of recreational sales, it would have been a much more muted response, in my opinion.

James West: Okay, so what’s going to catalyze the change in the weather, so to speak?

Charting Man Dan: It’s always emotion. It’s a cycle of emotions. We saw the top with extreme euphoria; it was palpable, everybody was pumped, everybody was talking about gains, you know, and now we’re seeing the exact opposite. So we’re monitoring social media as always, Facebook groups, Reddit, Twitter, and seeing people saying, You know, I want to take my losses now and exit the sector. The market’s week and I’m sick of seeing red day after day.

And so we reach a point where the retail investor just doesn’t want to take it anymore. They exit, and then that’s where we look for the potential shift in momentum. And really we were looking for that in the cryptocurrency space as well; that’s a more long, drawn-out version of euphoric cycles and fear cycles, but it’s a smaller version as to what’s going on in the Canadian MJ space as well.

James West: Okay, so if you’re starting to see those indications of absolute despair, the case where the night is darkest before the dawn, does that mean that we are on the verge, potentially, of a reversal?

Charting Man Dan: Well, it’s absolutely, we are always watching for it. We need to see daily trend changes; that’s the bottom line. We need to see higher lows and higher highs on the daily time frame; that’s going to mark at least short term relief and give us support levels that we can play off of. Right now, the vast majority of major names only have one or two major support levels anywhere nearby that we have to be playing off of.

So we’re keeping an eye out for it; the more we see, you know, people capitulating and exiting their positions, the more we’re paying attention: Hey, is this the turnaround? But in the end, it’s going to be the S&P 500 and, to a certain degree, oil that marks the temporary bottom, in my opinion.

James West: Sure, okay, elaborate on that a bit, on the price of oil and how that’s going to interact with the S&P on sentiment in the cannabis space.

Charting Man Dan: So I’m always about correlations; those who’ve been watching my videos know that I’m constantly talking about correlations and how they’re changing. Oil in the markets generally have a direct correlation; if oil is going up, the markets are going up. Some days you can literally line up the five-minute time frames and the candlesticks would be the exact same. You could overlap them and it’s so significant a correlation that the S&P 500 does exactly what oil does, or vice-versa to a certain degree.

And I’ll show you here in just a second on the charts how the top of the S&P 500 was marked by a very significant oil dump, and I do believe that oil is going to get at least a little bit of a relief rally in the near term, and I do believe that that will be a relief rally in the S&P 500, which in turn will be a relief rally in the Canadian MJ space, as it’s all correlated to a certain degree.

James West: So it could be all sunshine and rainbows again by the end of Q1, 2019?

Charting Man Dan: Well, let’s start with a start of a bounce. We’ll take it from there.

James West: Okay. [laughter]. All right, let’s go to the charts now, and you can explain your oil correlation theory.

Charting Man Dan: So here’s the S&P 500; I look at it through SPY, the ETF. This is the daily time frame, we had a big dump day on big volume yesterday; today, we’re pretty much bouncing around within that range, that’s what we call an equilibrium, things tighten up after a lot of volatility. The bottom line is, the bears are still in control after a break of support to lower lows.

If we go to the weekly time frame, we can see that the weekly SPY was pretty much up October. When October started, that’s when the dump started to get going, and it’s pretty much been three months of weakness. We just hit those lower lows, and if we bring up the oil chart, we can look at the monthly time frame, and over the last three months, starting in October, we have seen an all-out dump, taking back one year, 12 months of upside action, erased in three months of this dump.

So I’m looking at a major supporter on oil of 42.08, and I’m looking for that support level to hold and for us to form a higher low compared to that. So when we get a bounce and some relief on oil, we’ll just be looking for a lower high to form. Again, this dump is so significant that we’re not going to be looking or any kind of major trend changes, but on that bounce, where we look for the lower high, that’s where we’re going to be looking for SPY to see a weekly bounce to set its lower high, and then we’re going to be looking for Canadian MJs to be setting their lower highs as well.

James West: interesting. Okay, and so how does all that affect sentiment in the cannabis sector?

Charting Man Dan: Well, once we have some green and some relief in the S&P 500 – right now, what we have is people fleeing, you know, banking stocks, fleeing Amazon, Apple, all these major tech names. So if people are fleeing these extremely established names with established revenue and earnings, they’re not going to be putting it into an extremely speculative sector. We know that, you know, the cannabis sector has tons of potential, but they’re not proven.

So to think that people are going to move their money from proven companies and put them into speculative companies, it’s just not going to happen. But if money starts to come back into these companies and back into the market, we’ll be looking for people to be a little bit more, you know, liberal in terms of where they can allocate their capital, and maybe be willing to take on a little bit more risk if they don’t have to worry about the S&P 500 collapsing if we start to see this bounce get going.

James West: Okay, so then, it’s funny that the cannabis space is somehow then correlated to what’s happening with the price of oil, and we’re not talking CBD oil here.

Charting Man Dan: Exactly, and yeah, like I said in one of our last talks, I mean, as far as correlations and the markets go, we’re in such a globalized economy that everything is interwoven, and you know, Canadian MJ investors have to be watching what China is doing and what Trump is doing and these trade deals and oil. It’s a vast web, ad it seems overwhelming, but the more you see how these things interact – I mean, I’m staring at the screens every day and just watching these little minute ticks and seeing how everything is comparing to each other, and without a doubt, these correlations are certainly something to be aware of and to be monitoring, and I do believe that oil bouncing will give us a relief bounce in both markets and, of course, the Canadian MJ sector.

James West: I see some names are sort of responding positively to the general weakness, acting sort of in contrary to the general market direction, and others are more closely emulating the general market direction. Why are these names that seem to be, you know, less impacted by the negativity, why are they so less negatively impacted?

Charting Man Dan: Well, that can be a number of things. It can be, you know, little fundamental reasons; it can be really, honestly, that’s a great observation to me making int his point in time because when we see the shift happen in the market, and the market gets some relief bounce, the names that are holding up better are going to respond better to when the bulls finally do show up.

So as far as the bottom line fundamentally as to why that’s going on, I don’t have the answer; perhaps, you know, some of the hedge funds or bigger banks, investment banks, have done some more due diligence or are more confident in these names. I can’t speak to the specifics as to why, but what’s important is to recognize that it is happening, and to be able to act on it.

So today we had the news from Tilray, and Tilray getting their partnership with the pharmaceutical. It’s a little bit of a different deal, we didn’t get the capital influx, and some ownership like we saw with Cron and wit Canopy, but what we’re seeing is that we’re seeing, you know, Canopy is still reacting weak, a red day; we only have one support level nearby, and this is for CGC, it’s $28.10, the only support nearby; and we can see other names responding more bullish. APAG has a green day today and broke the high of the last two days, and here CRON as well is seeing a solid base of support being established at $11 on the US side of things, and I am going to be looking for CRON to potentially see a nice little bounce up into the mid-$12 range, as we have consolidated to the point where, you know, we had our bullish news, we saw that initial euphoria, people took their profit, we’re establishing a base of support around this $100 area, and now we’re going to look for a bounce and a lower high to form.

So it’s definitely standing out for more so today than in the recent past, whereas, you know, normally these major Canadian MJ names are normally moving in alignment with each other, whereas today we’re seeing CGC and ACB respond a little bit weaker, while APHA and CRON are responding a little bit stronger, and again, all of this response is in response to the Tilray news that we got this morning.

James West: Mm-hmm. Okay, well, Dan, that’s fascinating and insightful as ever. I appreciate your input. We’ll see you again next week.

Charting Man Dan: Have a great day. We’ll see you soon.