Canopy Growth (NYSE:CGC) has been full of misdirection as of late. CGC stock was giving bulls a nice pre-earnings rally before a two-dip ahead of the release. Upon popping higher on earnings, the stock is once again moving lower. What gives?
Putting our finger on this one has been tough, as the cannabis group has struggled. Those struggles began before the novel coronavirus outbreak, and while the rest of the market has rebounded back to its highs — or in the case of the Nasdaq, exceeded those highs — cannabis stocks have struggled to gain traction.
Investors are hopeful that Canopy, which continues to lead the industry, will be able to lead the group higher. For that to happen, must-hold support has to stand strong, while upside resistance needs to be taken out.
Of course, if the latter doesn’t happen now, CGC stock will always have another shot at rallying. But investors have been patiently awaiting a move to the upside. Will they finally get it?
Trading CGC Stock
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In the provided chart, one can see that Canopy stock dipped down to uptrend support for the third time in about a month. This came roughly two weeks before earnings.
However, uptrend support (blue line) provided a strong bounce, with shares reversing higher and breaking out over the 20-day, 50-day, and 200-day moving averages just two days later.
Leading up to that move, the 200-day moving average had been acting as resistance. Now it was acting as support, as CGC stock kept trying to rotate up through $20. Incidentally, that area is roughly the gap-fill from May.
Enough of the history lesson — what now?
The post-earnings reaction was initially bullish, but Canopy continues to struggle with the 200-day moving average. Now uptrend support is back in play as shares dip again. Ultimately I want to see a move above this cluster of moving averages up toward $20. Longer term, a rotation over $20 would be even more encouraging.
However, uptrend support is key in my mind. This has been guiding the stock for about six weeks and a break of this level likely puts $16 in play. Below $16 and dare I say, $13 could be on the table.
There is a lot of chop in CGC stock right now, and we need some clarity before proceeding. That is, if one uses technicals in their trading.
Canopy Growth Remains a Long-Term Winner
When Canopy reported earnings earlier this week, shares popped on the top- and bottom-line beat. Revenue grew 22% year-over-year as the company expands its different growth channels.
From CEO David Klein, “We grew our revenue year-over-year and are seeing market share improvement, notably achieving number one market share in cannabis-infused beverages in the Canadian market.”
The company continues to expand its presence in the beverage market, shipping more than 1.2 million cans to Canadian provinces since launch. Its partner could be key in this endeavor. With Constellation Brands (NYSE:STZ) having a sizable stake in Canopy — and recently upping that stake by exercising existing warrants — beverages could be a lucrative growth market.
That becomes even more true should the U.S. market continue moving toward legalization. That is, at the federal level vs. state-by-state legalization. That outcome may be swayed by the 2020 election — something cannabis investors should keep an eye on.
In any regard, I will continue to stick with the long thesis on CGC stock. The company has branching businesses like medicinal and beverages to help diversify revenue. It is preparing for the budding business opportunities here in the U.S.
New management is making the right moves and improving Canopy’s efficiency, reducing cash burn and improving returns. Its partner in Constellation has given Canopy notable balance sheet strength, something that lacks in its peers like Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY).
In short, there are a lot of reasons to bet on this name if one is long-term bullish on cannabis. That said, we need to see support hold on the charts, otherwise this one could get worse before getting better.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
