The balance of power has finally shifted for pot stocks. Canopy Growth Corp (NYSE:CGC), Cronos Group (NASDAQ:CRON) and even Tilray(!) (NASDAQ:TLRY) have formed bottoms and are gunning for higher prices. Overall though, CGC stock is one of the best looking of the bunch. So let’s analyze the looming breakout, and find a smart way to play it.
For many moons, Canopy Growth stock provided few reasons for bulls to bother. Its stock chart was riddled with down gaps, failed bounces and a multiplicity of other signs that accompany deathly descents. The declining 50-day moving average cast a shadow over every recovery attempt, becoming a graveyard in the sky where rallies went to die.
And then, the script flipped.
November’s earnings-driven plunge was rapidly reversed, resulting in an island reversal pattern that could spell the bottom for months to come. Since then, we’ve seen nothing but bullish price action.
The big question remaining is, what now?
Three Bullish Things About the CGC Stock Chart
Chart watchers can list the litany of evidence that CGC turned a corner over the past quarter. While there’s no doubt the stock could sour again, I’m willing to give buyers the benefit of the doubt given all of the ground gained this month. With that in mind, let’s chronicle the top three reasons to be bullish.
First, the price trend has turned. Since bottoming out at $13.81, the price of Canopy shares has increased by more than 50%. While it’s a far cry from the lofty heights of 2018, it’s a rousing start and has pushed the stock back to the topside of its 50-day and 20-day moving averages. The 50-day is also now rising to confirm the intermediate trend has reversed higher. Therefore, consider $29 and $30 as the next two upside targets.
Second, momentum is supporting the turnaround. The popular relative strength index (RSI) indicator surged to its highest level since last April during last week’s launch. It takes a powerful pop to jam this reading into overbought territory, and that’s exactly what happened. While the heat cooled during this week’s pause, buyers still maintain the upper hand.
Third, volume patterns reveal big buyers wading into the waters over the past two months. The groundswell in accumulation days confirms institutions have switched from sellers to buyers.
As positive as these three developments are, don’t lose sight of the fact that we’re talking about a pot stock here. Its fate can turn on a dime, so vigilance is a must. In light of Friday’s fall of around 6%, CGC stock may need some time before breaking out to start its next advance. Keep an eye on $25 as your trigger, as that’s near-term resistance and the level that must be breached before deploying bull trades.
Canopy Stock Options
To fully capitalize on Canopy’s explosive potential, I suggest long call spreads over strategies like naked puts or bull puts. The risk/reward is more attractive and offers a bigger payday. So, because implied volatility is high for CGC stock options, call spreads are smarter than long calls.
The Trade: Buy the March $25/$30 bull call spread. It currently trades for 95 cents, but will probably cost more like $1.35 by the time the stock pushes north of $25.
Overall, the risk is limited to your initial cost, and the reward is $5 minus the trade cost.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
