MSOS - MSOS: Cannabis Sector Consolidating Under The Radar Looking Constructive (Technical Analysis)

2024-01-02 23:24:46 ET

Summary

• The cannabis sector experienced a character change back in August, with record high trading volumes in sector ETFs like MSOS.
• MSOS is setting up to be a good buying opportunity, with contraction in price range and volatility over the past few months.
• The sector may need a specific catalyst, such as reclassification of cannabis as a Schedule III controlled substance, to see a significant breakout higher.
• That said, the technical charts of MSOS, TLRY, and GTBIF are looking increasingly constructive.

I previously wrote in September that we are witnessing a character change in the cannabis sector, with sector ETFs like the AdvisorShares Pure US Cannabis ETF ( MSOS ) seeing record-high trading volumes on news that the drug may be classified.

At the time of writing, the ETF was near-term extended and I was waiting for a buying opportunity if and when it pulls back and acts well. The first pullback to the moving averages back in late September was not a good buying opportunity, as the moving averages did not show signs of support that I was looking for.

Now, I believe the dust of the initial exuberance has settled, and the ETF is setting up to be a good buying opportunity.

We may observe the initial +100% climb in MSOS back in September within a short span of half a month. The moving averages did not hold when price pulled back, but we are now seeing a contraction in price range and volatility.

Daily Chart: MSOS

The distance between successive swing highs and lows has contracted, and volume has declined in the past 3 months, which is a sign of consolidation. MSOS is now building out a triangle pattern, and price is fast reaching the apex of this triangle where an expansion in price range and volatility should be expected.

Given the successive higher lows made after the initial pop back in September, coupled with the fact that the $5 level (level before the big move) has been well defended so far, I believe the path of least resistance is higher for MSOS, and I think a retest of the $9.88 level is on the cards at the very least.

I think the sector would likely require a specific catalyst to send it on its way out higher from the triangle pattern.

That could come in the form of rescheduling cannabis from a Schedule I controlled substance (same as heroin) to a Schedule III controlled substance. This was first touted by the Department of Health and Human Services back in August and could conclude before the elections in 2024.

At the moment, there are baby steps taken to legalise cannabis, such as a federal bill introduced in December that gives each US state the right to determine the best approach to cannabis legalisation within its borders. These steps are constructive and should support MSOS in its current price range. However, I think the sector still needs a bigger catalyst, such as the one mentioned earlier, to really see significant upside momentum.

The MSOS aims to invest in US companies with dedicated cannabis exposure. Many of these companies are listed in Canada, with Canada a better location to IPO compared to the US due to the latter's more stringent laws on cannabis.

As such, the MSOS ETF can provide exposure to many of these companies, which would otherwise be available to investors only via the OTC market.

Some of these cannabis stocks that are primarily listed in Canada look really good, from a technical analysis standpoint.

Green Thumb Industries ( GTBIF ) is building a large 1 year base and looks set to test the key breakout pivot ahead of its peers.

Daily Chart: Green Thumb Industries

Tilray Brands ( TLRY ) is US-listed and is not found in the MSOS ETF. It is found in the Global X Cannabis ETF ( POTX ) instead. We may observe that TLRY is building what looks like a double-bottom pattern spanning 9 months. Notice the huge buying volume between July and September. Similarly robust volume has returned in recent weeks.

Daily Chart: Tilray Brands

Within the cannabis space, the technical charts of Green Thumb Industries and Tilray Brands look the most constructive, and I am closely watching for a buy setup in the latter (as it is US-listed) to develop.

Green Thumb Industries makes up the largest weight of the MSOS ETF at 28%, due to its recent outperformance against the sector. Below, I have attached a snapshot of the ETF's largest holdings.

Top Holdings of MSOS

All in all, the cannabis sector is digesting its big run-up back in August pretty well. This consolidation is arguably under the radar, with the market focused on growth stocks and cryptos, which had a strong run towards the end of 2023.

That said, things are looking increasingly constructive in the charts of MSOS, TLRY, and GTBIF. The latter two stocks appear to be leading the sector higher, and I am watching for buy setups. For those who prefer sector exposure, MSOS is a decent play with superior liquidity compared to other cannabis ETFs at an average of 5.6m shares traded per day or close to $40m in dollar traded volume.

The MSOS ETF provides exposure to the cannabis space via a diversified portfolio of companies. This may be more palatable to some investors compared to buying specific names in a volatile industry. For a management fee of 0.60%, the active management of the MSOS ETF can be desirable. Do note that this is not a dividend play, as this ETF does not provide any dividend at the moment.

MSOS is trading -88% below its all-time high, plunging by that much in a short span of 3 years. There is certainly room for an explosive rebound if there is a strong enough catalyst. Political developments are increasingly pointing towards that favourable scenario.

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