Cannabis stocks rallied on Wednesday, Nov. 20 on the back of a congressional committee passing a bill that looked to lift the federal ban on weed. As a result, shares of Canopy Growth (NYSE:CGC) also got a boost, which in turn left a notable bullish mark behind on the chart. All else being equal, this now calls for more upside in the stock.
Before looking at this trade idea, allow me to say that the medical cannabis industry, while quickly growing, is also highly sensitive to headline news, particularly as it relates to regulatory headlines.
Yesterday’s rally in cannabis stocks is a prime example of this, but we must not forget that this can cut both ways. In other words, while I see the below trade idea as valid, it does also come with the potential for much above average volatility and thus risk.
CGC Stock Charts
For perspective let’s first look at the multi-year chart with weekly increments. Here we see that CGC stock has been on a steady decline since early May; the down-trend is well in tact and defined. In September the stock then dropped below horizontal support around the $25 mark and fell even further in days following the company’s latest earnings report.
From a momentum perspective, the weekly MACD oscillator at the bottom of the chart is now deeply oversold, although it has been so for the past two months.
It is too early to detect much of a bullish reversal on the weekly chart just yet and the down-trend remains firmly in tact. As we will see on the daily chart, however, this could be in the process of changing.
On the daily chart we see that CGC stock gapped lower on Nov. 14 following the latest earnings report that investors were not impressed by. After two more days of selling, however, on Nov. 19 sellers finally exhausted themselves as the stock failed to stay lower and printed an outside day, i.e. a bullish reversal day. This was followed on Nov. 20 with a big follow-through buying day.
The down-gap on Nov. 14 followed by the up-gap on Nov. 20 formed a so-called ‘island reversal pattern,’ which should have at least short-term bullish implications for the stock.
If momentum continues, I see the stock moving higher toward a next upside target around $20, possibly followed by $22. Any strong bearish reversal that wipes out the gains of the Nov. 20 rally would be a stop loss signal.
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