When it comes to technical stock trading, it can take a long time before you finally see the “full picture.” There are often tiny details hiding in the charts. But once you see them, the profit opportunity becomes clear.
It often reminds me of a stereogram. It’s a 3D “picture within a picture.”
At first glance the stereogram will appear to be static or gibberish, but as the eyes adjust, the image comes into focus.
It’s a trip when you finally see that “picture within a picture.”
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The first time I saw a stereogram, it took me nearly an hour before my eyes relaxed. But finally, I saw the hidden picture.
Technical stock trading gives me a similar feeling.
Many investors can stare at charts and never see the picture within a picture. But those with a well-trained eye see something entirely different.
For example, take a look at this chart of popular cannabis stocks.
Clearly, there’s a lot going on there.
To the untrained eye, it’s all static with nothing of value to be discerned.
Fortunately, there is a simple tool that can be used to help you see the picture within the picture of a complex chart like the one above.
It’s that tool and the ability to see the whole picture that can help you pad your portfolio with profits time and time again.
This is especially true for stocks with high volatility, like cannabis stocks.
In general, owning cannabis stocks is a good idea for the long term.
From a fundamental standpoint, the growth prospects are fantastic as legalization of marijuana spreads across the United States and the rest of the globe.
But there is more to it than just the fundamentals.
Cannabis stocks are extremely volatile as traders position in front or behind rapidly moving developments in the industry.
One day the sky is the limit and the next the sky is falling.
As a result, there is an opportunity to profit from trading the volatility moving in and out of cannabis stocks at just the right time.
But, how can we determine when the right time arrives?
That’s where seeing the “picture within the picture” comes in handy.
When we specifically look at just one of the cannabis names in the chart above, a different picture emerges.
Here’s what I mean…
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Superimpose upon that picture the one simple tool that will tell you when the time to trade has arrived, and you have a powerful weapon in your arsenal.
That simple tool is the 200-day moving average – a statistic that calculates the average closing price of a security over the last 200 days.
On any given day, the price of a stock can be influenced by many things that have nothing to do with the value of a company.
Using a 200-day average smooths out some of the volatility and is thus a better judge of value than a one-day snapshot.
Where a stock is trading in relation to the 200-day moving average can be used as a trading trigger when volatility strikes.
Let’s look at how the 200-day moving average works on a stock like Canopy Growth Corp. (NYSE: CGC).
It should be clear almost immediately how valuable the 200-day moving average can be.
Over the last year, shares of Canopy moved violently compared to the 200-day moving average. In each instance when the stock tested the average, a significant breakout occurred.
These breakouts produced enormous gains for investors.
Most recently Canopy breached the 200-day average in mid-June.
After reporting earnings that disappointed investors, shares traded below the 200-day moving average, potentially signaling a bearish move in the stock.
What does that mean for investors today?
It means be cautious, what happens next isn’t immediately clear.
Keep your powder dry to see what transpires in coming days.
Already the stock has bounced off lows produced after the earnings report.
Still, we are below the 200-day moving average.
I wouldn’t pull the trigger just yet, but if we get a move back above the 200-day moving average we very well may have the next big opportunity to own Canopy Growth.
It will take a few days of trading above the average to be considered a successful test. If so, then it will be off to the races.
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