If you stretch a rubber band too far, too tight, what happens?
It snaps back, right?
Well, what if I told you the same idea can be applied to marijuana stocks?
If a stock is pulled too far, too tight in one direction, eventually it’ll snap back and revert to mean, otherwise known as mean reversion. And one of the best ways to spot where a stock is likely to pivot and move in the opposite direction is with Bollinger Bands (2,20).
Just what are Bollinger Bands?
With Bollinger Bands (plotted at standard deviation levels above and below moving averages), stock prices tend to stay within the upper and lower bands.
They allow users to compare volatility and relative price levels over a period of time.
They consist of three bands:
- A simple moving average (SMA) in the middle
- An upper band (SMA plus 2 standard deviations)
- A lower band (SMA minus 2 standard deviations)
While the technical jargon can be confusing, its application is what offers us opportunity.
For us, the Bands let us know just how far we can pull a rubber band. Pull it too far south, eventually it’ll snap back. Pull it too far north, and it’ll snap back over time.
The End of a Prohibition
Learn How Average Americans are Becoming Marijuana Millionaires!
Get the Full Report Here!We can clearly see that here with Bollinger Bands set at two standard deviations above and below the 20-day moving average. Look at what happens about 80% of the time when the upper or lower Band is hit or penetrated.
The stock in question reverses and pivots in the other direction.
However, it’s never safe to just rely on one key indicator.
Confirmation with other indicators is essential. For example, look at what happened to the ETFMG Alternative Harvest ETF (MJ) in April 2018. Not only did the ETF hit the lower Bollinger Band, but RSI became oversold at its 30-line. MACD fell to a historic low. Williams’ %R fell below its 80-line.
Once all of those indicators aligned with MJ at its lower Band, the stock reversed and ran from $26 to about $33 not long after. Even if you’re not into technical analysis, keep an eye on it. It’s a great way to gauge momentum.
Bonus Report: Turn a Small Stake into a Fortune: A new earth-shattering government announcement could completely change the legalization of marijuana - forever. In fact, thanks to this historic legislation, tiny pot stocks trading for under $5 are getting set to double, triple, or quadruple. In an exclusive interview with Money Morning, pot stock expert Michael Robinson shares all the good news - including details on five tiny weed stocks that could potentially turn a small stake into $100,000. Click here to continue.