The “Year of the Stoner” is starting early.

Six weeks ago, we looked at the cannabis sector and suggested the stocks were “remarkably cheap.”

The industry itself is thriving. But most of the pot stocks peaked back in February, and they’ve been falling ever since. Many of the leading stocks in the sector are trading 70% or more off of their highs.

But, we argued the fundamental reason for buying pot stocks was stronger than it’s ever been. And, the technical action was hinting that the sector could be ready to reverse soon.

So, we figured cannabis stocks could be big winners in 2022…

It looks to me like the pot stock rally is starting right now.

The entire sector got a big boost last week on legalization hopes as legislatures in Virginia and Ohio moved towards authorizing the legal sale of cannabis products.

That news caused a strong bounce in many of the pot stocks. And that, in turn, flipped the technical picture of the sector from bearish to bullish.

Look at this updated chart of the ETFMG Alternative Harvest ETF (MJ) – an exchange-traded fund (ETF) that tracks a basket of cannabis stocks…

chart

(Click here to expand image)

When we looked at this chart a few weeks ago, we noted that while the stock was declining… the various technical indicators at the bottom of the chart (MACD, RSI, and CCI) were rising. This sort of “positive divergence” is often an early warning sign of an impending rally.

That rally kicked into gear last week.

Notice how MJ is now crossing above all of its various moving average lines.

Also, notice how those moving averages are shifting into a bullish configuration – with the short-term 9- and 20-day exponential moving averages (EMA – red and green lines) crossing above the long-term 50-day moving average (MA – blue line).

This often marks the start of an intermediate-term rally phase.

But, the sector isn’t completely out of the woods yet… MJ has pulled back from last week’s high. Now, it needs to find support near its current price.

If MJ keeps pulling back and dips below last week’s low at about $14, then it’ll break the recent series of higher lows. That would likely delay the rally phase.

On the other hand, if MJ finds support right here and bounces back above last week’s high of about $15.20, then we’ll have another higher high on this chart. That’ll confirm the pot stocks have bottomed and are now in rally mode.

If that happens, traders should forget about waiting until 2022 to celebrate the Year of the Stoner. The celebration is starting now.

Best regards and good trading,

Jeff Clark
Editor, Market Minute