Math over Myth is your weekly guide to stocks and ETFs in the psychedelic sector, this week focusing on the ETF PSIL
Investing in the stock market is a fancy euphemism for gambling. But unlike traditional brick-and-mortar joints with slots, craps, and blackjack, the Crazy Capitalist Casino allows you to bet on the house – and the house always wins. How can the average retail investor adopt a healthy risk-and-reward mindset? Math Over Myth!
Math Over Myth removes romance and mythology from investing to focus strictly on price movements, mathematics, and technical analysis. Regardless of long term value and growth prospects in medicinal psychedelics, the public market space is still very young and volatile. While fundamentals aren’t entirely irrelevant, adopting a savvy gambler mentality requires a healthy dose of nihilism in this department.
Betting on emerging, disruptive, and speculative sectors of the marketplace doesn’t necessarily need to be a risky endeavor if you approach it with the right mindset, formulate a plan which allows you to remove the romance from the good time and not second-guess your strategy during bad times. Today we refocus on the actively managed AdvisorShares Psychedelic ETF PSIL.
Psychedelic Sector ETF
Spotlight previously covered AdvisorShares Psychedelic ETF (NYSEARCA: PSIL) in a primer for the sector’s exchange traded funds and their utility in amplifying gains while mitigating risk:
PSIL is the only one which is actively managed… This allows them to invest [large] sums into smaller companies they believe have greater opportunity [and] quickly rebalance their ETF in response to changing variables. PSIL is a pure-play psychedelic medicines ETF, with [all 28 constituents] being a psychedelic [stocks]. They have $5.9 million under management.
Actively managed PSIL confirmed a bottom of approximately $2.50/share, which first occurred in Q2 2022 (mid May), once during Q3. Since October began, PSIL pulled back from $3.25 with a downward trajectory, and on October 13th I predicted a retest of its support level @ $2.50/share.
After a successful retest and brief uptick, the bears successfully breached $2.50 last Wednesday and sustained it through last Friday’s close.
Spotting A Great Divergence in The Force
What are technical divergences? What do they mean? How do I spot them? It’s a great time to explore these questions using PSIL.
A divergence occurs when a lower indicator (below the price chart), such as the Relative Strength Index (RSI), forms a pattern opposite to the chart’s price action. PSIL’s daily chart is a real time example of a technical divergence. Its price made a lower low, $2.42 down from $2.50, while the RSI (first lower indicator) made a higher low. This is commonly referred to as a positive or bullish reversal signal.
See the daily chart below with thick, solid white lines demonstrating these technical divergences from PSIL’s price action in the RSI, Money Flow Index (MFI), and Moving Average Convergence Divergence (MACD) oscillators.
One technical divergence is a great sign, but three is a blaring bullhorn. Positive technical divergences signal supply side exhaustion. In other words, the bears are growing weary of selling.
The RSI divergence implies that the strength of the sell off is waning since late September. Divergences in the MFI signal money flowing back into PSIL during the sell off in early October. Similarly, the MACD highlights divergences in the daily chart’s moving averages. While no one single indicator is a panacea, this amalgamation tells a strong tale of trend reversal.
However, it doesn’t necessarily mean that PSIL snaps the downtrend and reverses course right away. For instance, PSIL can continue diverging and potentially drop to its next support level of $2.04/share.
Never try and catch a falling dagger unless you enjoy bleeding. Wait for confirmation, assess your risk tolerance, and deploy mitigation strategies accordingly.
Macro Tailwind Factors
Any emerging, speculative, growth sector like psychedelics is destined to be coupled to broad market action, but with increased volatility: higher highs and lower lows. When the markets start to move in a positive direction, investors feel comfortable jumping back into the warm water. This type of phenomenon should be a boon to PSIL and the psychedelic space.
Fortunately, charts like SPY and QQQ, S&P 500 and Nasdaq 100 ETFs, respectively, already popped last week after making their own positive divergences in weeks prior. Moreover, Biotech ETF XBI recently flipped old support into new resistance on its chart and made a double bottom to test and confirm its new support level through successful defenses by buyers. These are all important, strong signals of markets ready to reverse.
After over-hiking rates and scaring liquidity out of the game for about two months, perhaps the Federal Open Market Committee (FOMC) learned their lesson and won’t score the ultimate own goal by unnecessarily further tightening the money supply, thus squeezing a recovering economy with a growing labor force and long overdue wage growth into an unprovoked recession.
However, my experienced and educated guess is the FOMC will ultimately get the message and back off their aggressive tightening, rate-hiking hawkishness. After all, inflation is a global phenomenon currently catalyzed by supply chain disruptions still being felt by COVID and one of the largest energy producers invading the world’s bread basket. Naturally global food and energy prices are up.
But how is the United States fairing by contrast? It may shock you to learn that, relative to much of the world, America’s inflation rate is rather paltry by comparison.
All of these factors tell me markets have already bottomed out and will begin to consolidate as liquidity moves from the sidelines back into the casino.
This can only benefit PSIL and the psychedelic sector. With other company catalysts to come in Q4, as well Colorado’s ballot initiative, Senator Booker furthering conversations in the senate, and the DEA significantly increasing their 2023 quotas for the production of psychedelics like psilocyn, LSD, 5-MeO-DMT, and mescaline (DMT, MDA, MDMA, and psilocybin will remain at 2022 levels), all signs point to a better autumn for psychedelic stocks.
Craig D. Schlesinger is the CFO of PSYC Corp & Spotlight Media and a market analyst with over twenty years experience predicting price movements and trend reversals in various sectors. Follow his #MathOverMyth technical analysis and him on Twitter: @PSYCCraig
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Craig holds no positions in PSIL, SPY, QQQ, or XBI
*This article was written before markets opened on Monday October 23, 2022
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