If you missed the recent marijuana stock mania, listen up. Your second chance has arrived. Canopy Growth (NASDAQ:CGC) is completing a pullback pattern, and buyers are swarming at support. The entire industry is forming a similar setup, so there’s no shortage of choices for how to play. I’m partial to CGC stock, so we’ll highlight two compelling strategies to choose from.
But first, let’s analyze the industry using the Alternative Harvest ETF (NYSEARCA:MJ). It counts the biggest players in the space among its top holdings, including Canopy Growth. It’s also Wall Street’s go-to vehicle for broad-based exposure to cannabis.
The appeal of an industry-centric exchange-traded fund like this is that it offers a diversified bet for investors who don’t want to tie their fate to a single company. When owning a fund, earnings risk and company-specific drama are taken off the table.
Let’s take a closer look at the recent action.
Marijuana Stocks Go Boom
November lit a fire under MJ after Joe Biden won the Presidency. Then, in January, more gasoline was poured onto the fire after Democrats swept both of Georgia’s Senate seats. Pot, it appears, is positioned to shine under our new leadership. The bullishness sent prices into orbit last month once the Reddit crowd decided to move into cannabis companies after their rousing success with GameStop (NYSE:GME).
The explosion nearly doubled the price of MJ. But, as is the flight path of all manias taken too far, prices ultimately corrected.
However, instead of giving back all the gains, we’ve found support near the old breakout area. Despite the monster volatility, MJ remains quite well-behaved from a trending perspective. The recent drop only slightly undercut the rising 20-day moving average, but it’s still forming a higher pivot low to keep the overall uptrend intact.
Volume patterns have also returned to normal, which confirms the selling pressure has eased for now. Any consolidation in this area is constructive. It will allow prices to work through any lingering supply and build a base for the industry’s next ascent. Tuesday morning’s rally caught my eye because it carried MJ to the underside of its 20-day moving average. We may need time yet before a breakout emerges, but I find the recent bottoming action encouraging.
Set an alert at $24.50. That’s the line that needs to be broken to signal the next advance has begun.
CGC Stock Chart
The flight path of CGC stock is similar to MJ, only with more volatility. Since peaking at $56.50 on Feb. 10, prices have returned from orbit. We cracked through the 20-day moving average in short order, but now find buyers emerging at the 50-day and an old support level at $32. At the same time, distribution days are drying up to reveal bears’ wrath is waning.
Tuesday’s jump carried CGC above a short-term pivot amid rising volume. The run hints at accumulation or the return of big buyers. If it sticks, it’s the best evidence we’ve seen in the past month that a new bull run could be in store.
I have two strategies worth exploring if you want to bet with buyers here.
Two Bull Strategies
Let’s start with the more aggressive of the two. If you think CGC stock climbs back above $40 in the next two weeks, you could buy March call spreads.
The Trade: Buy the March $35/$40 bull call vertical for $1.75.
You’re risking $1.75 to capture $3.25 potentially. On the other hand, the more conservative or higher probability alternative is selling April put spreads.
The Trade: Sell the April $27.50/$22.50 bull put for 61 cents.
Consider this a bet that prices remain north of $27.50 for the next month. The potential profit is 61 cents, and the loss is $4.39. To minimize the damage if CGC sinks, you could exit at the short strike of $27.50.
On the date of publication, Tyler Craig held LONG positions in MJ.
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