The past six weeks have seen no shortage of big winners. But did you know pot stocks were among the top performers? A perfect storm finally put a bottom in the industry. Shareholders are now riding high on a rising trend. Canopy Growth Corp (NYSE:CGC) has the healthiest chart of the bunch, making it my top pick if you’re looking for a speculative bet. Volatility is nothing new for the Canadian cannabis company, but I’d be lying if I said I wasn’t impressed by CGC stock doubling over the past six weeks.
Optimists will argue it could double again if it musters the strength to return to its 2019 highs. As for me, I’m not a fan of grandiose predictions. All I know is Canopy’s trend is now firmly higher, thus I’m a bull and a buyer. We’ll dig more into the chart to make the technical case in shortly, but first, let’s outline why post stocks are suddenly all the rage.
The Perfect Storm
The trend toward legalizing recreational marijuana use accelerated this month with multiple states voting in favor of weed. Residents in Arizona, Montana, New Jersey, and South Dakota adopted an adult-use cannabis law, expanding the marketplace for the likes of Canopy Growth.
At the same time, Joe Biden’s narrow win of the presidency paves the way for decriminalization.
But it’s not just tailwinds from the election buoying pot stocks, it’s also a pair of rosy earnings reports from Canopy and Aurora Cannabis (NYSE:ACB). Investors cheered both company’s numbers after the pair announced better-than-expected sales forecasts and dwindling losses.
If the positive news and earnings aren’t enough to get you in the buying mood, then the convincing price launch from the lows should. We’ve seen a grand rotation into beaten-down industries from oil and banks to small-caps and value over the past two weeks. The rising tide is lifting lots of boats – cannabis stocks included.
CGC Stock Chart
For much of 2020, Canopy shares have been cast adrift in search of a catalyst. The earnings announcements ahead of this month were all duds and lacked the firepower to spark a sustainable trend. The weekly trend was stuck in a range beneath both the 200-week and 50-week moving averages. A higher pivot low formed in October signaling buyers were at least still living, but it’s the mega-breakout and blast through the $20 resistance zone that should really excite spectators.
If you’ve been waiting for the long-term trend to awake, then wait no longer. The bull is awake, hungry, and seeking food at higher prices.
Buyers are currently wrestling with some resistance in the $25 zone. Above that, however, and CGC stock could make a run for $34. No matter how you spin the big picture, it’s now much easier to be a dip buyer now that a bona fide uptrend has taken root.
The sharpness of this month’s ascent is best seen in the daily time frame. Note how the 20-day and 50-day moving average are now both pointing sharply higher. Momentum behind the run has been powerful and makes any continuation pattern that comes down the pike a very tempting buying opportunity. Ever since October, volume patterns have been extremely one-sided. Accumulation days have multiplied to reflect a mass institutional influx.
Chalk that up as yet another reason why the new trend is likely here to stay.
Options premiums are high enough to make short puts attractive. The probability of profit is higher than a long stock position.
The Trade: Sell the Dec $22.50 put for around $1.10.
Consider it a bet that CGC will trade above $22.50 at December expiration. If it does, you’ll pocket $110 per contract.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!
