Relative Strength vs MSOS: How YCBD Signaled a Move Before the Cannabis Sector

 

Today was a great real time example of relative strength versus MSOS, and it reinforced an important lesson I’ve learned over the years. It’s not enough to only compare your stock to the S&P 500. That’s useful, but it’s incomplete. You also need to know how your stock is behaving relative to its industry group. In this case, that benchmark is MSOS, the cannabis ETF.

If you look at the 5-minute chart of YCBD above, with MSOS plotted in the lower pane for comparison, something immediately stood out to me. Around 1:00 ET, MSOS was making new lows and was clearly in a downtrend. The entire cannabis space was under pressure. Yet YCBD refused to follow it lower. Instead of making a new low with the group, YCBD put in a higher low. That divergence is not random, and it’s exactly the kind of information I look for when I’m hunting for opportunity.

When an entire sector is being sold, as clearly shown by MSOS, and one stock simply stops going down, that tells me sellers are running out of ammunition in that name. Buyers may not be aggressive yet, but they’re quietly absorbing supply. I even pointed this out on social media in real time, saying I was watching YCBD for a break of the high of day.

Once that high of day was taken out, YCBD responded exactly how a strong stock should. It gave us a clean pop and closed near the highs of the session. The real confirmation came after the closing bell. While every other cannabis stock went quiet, YCBD kept pushing higher, eventually tagging 1.93 in the after-hours session. It’s no coincidence that it was the only cannabis stock moving after the close.

Relative strength, especially relative strength against the ETF representing your industry group is what tipped me off to this move. On the daily chart, we now have our first green day after a three day selloff. That’s a small but important change in character. From here, I’ll be watching closely for continuation to the upside in the days ahead, letting relative strength continue to guide my decision-making.

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