If we’re to believe Tuesday’s headlines, cannabis stocks are getting smoked in an earnings-driven chain reaction. Yet Canopy Growth (NYSE:CGC) stock investors are looking chill. Let’s examine what’s driving the bullish price action off and on the price chart and present a stronger-risk adjusted way to position.
Following a dismal 2019, cannabis investors can’t be faulted for asking “is a bottom in?” But if we’re to take medicinal producer Aphria’s (NYSE:APHA) quarterly results at face value, the answer becomes less clear. The first of the market’s publicly traded pot stocks to report in 2020 disappointed Wall Street with light revenue and lower guidance. The cannabis stock news has been generally depressing. And shares of Aphria are off 5.50%. At the same time, Canopy Growth stock is up 4.50%. So, what gives?
Part of Canopy’s resolve might have a David vs. Goliath feel to it. Aphria is a much small and niche cannabis outfit. Conversely, CGC stock is the market’s largest producer. The company also has the financial wherewithal to capitalize on a likely turnaround from last year’s ad nauseam “everything that could go wrong, did go wrong” fallout which caught so many investors off guard and left holding big-time losses.
To be clear, there’s no guarantees the cannabis industry will improve in 2020. But given last year’s painful lessons, there is obviously more room than otherwise for improving trends to emerge.
What’s more, today’s headline-teasing [choose your favorite: plunge, hammered or slamming] of Aphria isn’t all that big of a deal. The fact is the purported backlash amounts to a fractional loss for a stock fetching about $5.00 a share. Weighed against a still-intact monthly chart bottoming pattern, Tuesday’s “fallout” looks even more suspect.
Lastly, with Canopy Growth stock sporting a similar bullish price pattern and just off a historically low valuation, there’s reason to see and believe Wall Street’s climbing a wall of worry initiative has begun.
Canopy Growth Stock Price Monthly Chart
Last month and in the final days of 2019’s punishing year for the cannabis industry, I discussed why the Canopy Growth stock price chart was supporting a turnaround. In fact, shares were determined to finally be in position for buying. What was behind the optimism?
Source: Charts by TradingView
Aside from the heavy and opportunistic negativity surrounding CGC, the decline in price set up a major bottom based on a Fibonacci-based two-step or mirror move pattern. Coupled with price confirmation in December and a bullish stochastics crossover, it was time to buy Canopy. The recommendation was offered as shares changed hands at $20.12. Now shares are up nearly $4.00, or 20%. What’s more, in our observation there’s additional upside to come.
I’m not promising Canopy Growth stock will go on to become the next Apple (NASDAQ:AAPL), or Home Depot (NYSE:HD) for that matter. Still and without being too optimistic, if the price pattern continues to prove its durability, the sky may not be the limit for CGC, but a move to challenge Fibonacci resistance from $29-$33 looks increasingly realistic.
Market Maker Edge: Given Canopy Growth stock’s fairly steep price volatility and rally off its lows, I’d be hard-pressed to confidently buy shares with a traditional stop-loss. My advice is to buy a limited and reduced risk, out-of-the-money bull call spread. One favored vehicle of this type is the April $25/$30 call combination priced for $1.35 with CGC stock at $23.40.
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.