As any investor with a passing interest in the markets knows, Canopy Growth (NYSE:CGC) and other cannabis stocks have gotten smoked in 2019. The question is could a bottom be baked in? Let’s dig into CGC off and on the price chart to reach a stronger risk-adjusted position on the outlook for Canopy Growth stock.
After a stunning rise beginning in 2017 and well into 2018, this calendar year hasn’t proven nearly as easy for Canopy Growth stock bulls riding the cannabis wave on the back of Canada’s largest producer. To be fair, there have been volatile opportunities for nimble traders. But that certainly hasn’t been the case for more grounded, intermediate-term buy-and-hold investors of CGC.
Shares of Canopy are off 26% in 2019. And from its April peak, CGC stock is down roughly 60%. The other painful truth is that cannabis’ version of the next, next big thing — which inspired CGC’s former resolve — has been rightfully replaced. This year has ushered in a plethora of reality checks ranging from oversupply issues, distribution headaches, ongoing regulatory challenges, cash burn and rising costs, as well as lots of associated earnings disappointments, topped off with tons of red ink.
Sure, investors could point to the fact these issues aren’t solely the domain of CGC stock. And its true 2019’s bear market in pot stocks has been fairly systemic. Well-known players from Cronos Group (NASDAQ:CRON) to Aphria (NYSE:APHA) and Tilray (NASDAQ:TLRY) have all taken it on the chin for similar reasons. But what’s the point in commiserating, other than misery loving company?
The good news is 2019’s bearish wake-up call and extreme pessimism towards cannabis stocks opens up the increased chance there will be better days ahead for Canopy Growth stock.
To be clear, I’m not promising the next Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX) or Costco (NASDAQ:COST) for today’s CGC investors. Still, as the market’s largest company and one backed by Constellation Brands (NYSE:STZ), there’s a chance for a big-time turnaround. As well, with a price chart now showing its own signs of strong support, 2020 could be a trend-changing year worth buying into.
Canopy Growth Stock Monthly Chart
Source: Charts by TradingView
After trending lower for the past several months, Canopy Growth stock is in position for a major bottom to develop into a significant bull market. Behind this outlook is a Fibonacci-based, two-step or mirror move pattern.
The price design of the two-step pattern involves legs ‘AB’, ‘CD’ and middle counter leg ‘BC.’ When the second leg has traveled the same distance of the first leg, the pattern is complete. The expectation for the next meaningful price reaction is for a move in the opposite direction. And that’s good news for Canopy Growth stock.
Canopy’s two-step pattern completed near $18.50 in October. The finishing point also aligned with a 76% retracement level. The support level’s cycle low began in 2017 following CGC stock’s ‘1st whiff all-time-high’ labeled on the provided monthly chart. But a picture perfect bottom wasn’t meant to be.
CGC’s extreme sentiment and awful-sounding November earnings release resulted in shares extending the correction into a test of 2017’s high before a bullish hammer candlestick formed which was then confirmed earlier this month. Now, and along with a bullish oversold stochastics crossover in place, there’s good technical evidence in place for a bottom in CGC stock. And amid Canopy Growth stock’s volatile behavior, I believe investors have an opportunity to buy shares today on well-supported weakness with less risk.
I’d recommend taking CGC stock’s limited, but volatile technical exposure one step further and close the position if shares fall beneath $17. This exiting strategy is marginally below the December low and would find shares failing the two-step bottom and 76% level as well. In our view that’s sufficient price action to pull the plug. Optimistically though and if the pattern does prove durable, the sky may not be the limit for CGC, but $29-$33 looks realistic given today’s and this year’s circumstances.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.