CannaRoyalty Corp (CNSX:CRZ) (OTCMKTS:CNNRF) (FRA:CY4) could be on the verge of breaking out, according to the charts. This makes sense from a rational point of view, as we’re noticing somewhat of a “trickle down” effect in the California cannabis space currently.

From my perspective, money appears to be trickling into a third sub-section of cannabis names focused on the American marketplace. While several states are proactively legalizing or relaxing recreational and medical cannabis statutes (New York, Massachusetts, Florida and others), California remains the big prize for investors.

As we’ve pointed out before, not only in California the 5th biggest stand-alone economy in the world, in many ways it’s America’s culture hub. Succeeding in California provides a certain prestige that goes beyond bottom line results; there’s an incalculable promotional element at play which could potentially elevate brands to a higher plain.

Best of all, the California market is such that there’s ample opportunity for an organized, top-down operator to make a big impact in the state.

According to Humboldt State University economics professor Erick Eschker, about $5.5 billion of California’s $7.8 billion in pot sales is generated from unlicensed and unregulated growers, distributors, and dispensaries. That means plenty of contaminated product, with unknown THC/CBD ratios and sub-standard operational hierarchies. On numerous levels, market share is just begging to be transferred from the black market to the legit market.

CannaRoyalty understands this, and they’ve quickly taken steps to establish a beachhead in the state.

In late March, the company announced 100% acquisition of River Distribution and its affiliates, which represents numerous leading California brands sourced from across the state. Particularly, it segues CannaRoyalty into the lucrative dispensaries market, where it can license its retail product portfolio. RVR generated US$25.4 million in revenue in fiscal 2017. It also maintains 100% ownership of state distributor Alta Supply, and an exclusive distribution deal with Bhang, one of California’s best-known brands for edibles and concentrates.

Furthermore, CannaRoyalty added to it’s state portfolio in mid-April when it purchased FloraCal Farms, a premium craft cannabis company with $6.4 million USD in existing revenue in 2017, generating $3.2 million in EBITDA.

CannaRoyalty has made a large bet in the state, and it appears to be paying off.

As the chart shows, aside from the volume profile—which remains less than convincing at the present time—the planets are aligning for a potential breakout scenario. Prices are trading at 2-month highs, and well clear of 20/50/100-Day MA overhead resistance. We note a series of three distinct bottoms in the $3.50/area, and there’s ample price support all the way up from that zone to $4.15/share. Perhaps most notable has been CannaRoyalty’s out-performance versus it’s small cap Canadian peers not immersed in the Golden State:

We don’t need to stack the charts side-by-side to perceive the powerful disconnect CannaRoyalty is undergoing versus the cannabis small cap sector at large. Whether that’s explicitly due to CannaRoyalty’s maneuvering in California is up for discussion (they have tentacles in other markets and brands in Canada and outside the state), but it sure looks that way to us.

Our short term price target in a breakout scenario: $5.70/share, which is the all-time high and secondary price extension level from the April low ($3.50) to breakout zone at $4.60/share.

Another name to keep an eye out for in Cannex Capital Holdings, the major cannabis player in the state of Washington. We recently profiled this company and their plans to become a major force on the U.S. West Coast. While the chart isn’t technically as aligned (yet), they have the kind of edibles portfolio, top-down management structure and vision to carve out significant market share in California.

Cannex Capital Holdings Inc. Director and CEO Anthony Dutton lays out the goals of Cannex which is to become leaders in other US states as well leveraging their processing know-how to achieve similar success in other areas.

Midas Letter will continue to follow this segment of the market as further news events warrant.