Canopy Growth Corp (TSE:WEED) and the Most Watched Technical Pattern In Cannabis Investing Today

Benjamin A. Smith
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For Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1)—and the rest of the cannabis sector by association—the time is drawing near. The undisputed industry leader is currently forming perhaps the most widely followed technical pattern in cannabis investing today. Its ultimate outcome will decide whether the next great pre-legalization rally arrives as anticipated, or whether investors were barking up the wrong tree.

The “great formation”, as I like to call it, takes  shape as a well-defined symmetrical triangle (ST) formation on the daily chart. Essentially, the ST consolidates in meandering fashion within the pattern by making a series of lower-highs and higher-lows until an apex is reached. Once that point hits, explosive price action is often encountered in direct proportion to the underlying volume it receives. Higher volume is usually associated with greater upside/downside price extension.

Without further ado, here’s how Canopy Growth is presently shaping up on the daily chart:

As we can see, this isn’t your typical garden-variety technical setup. There’s almost five months of narrowing consolidation action on heavy volume. The average 3-month volume in Canopy Growth is around 5.7 million shares traded, which ranks it among the TSX’s most active issues.

Judged in a market capitalization context, Canopy’s volume profile is even more impressive. In early April, media outlets reported that Canopy was the fourth most-traded stock by value on the S&P/TSX Composite Index in the first quarter—only the three biggest banks posted higher dollar volume.

Perhaps more significantly, there hasn’t been a monumental drop-off in volume since Canopy made new highs in January. Naturally, there’s been some degradation; but not the 70-percent plus volume typically seen in stocks where investor focus has moved elsewhere. It appears from the consistent and still-elevated volume profile that investor interest in Canopy Growth remains significantly elevated. Thus, investors should expect the thrust behind the “great formation” apex to break with proportional strength, as copious amounts of sideline retail/institutional money start entering the fray.

Furthermore, volume is getting to the point where we believe a “great formation” resolution is coming. Not only is the ST squeezing to a point where resolution must take place, volume is grinding to anemic levels. Prices are simply running out of resistance-free space in which to flow.

For example, only 1,781,300 shares were traded in Canopy Growth today (↓$0.01 to $27.24/share), almost 70-percent lower than its 3-month median average. In fact, this was the first sub-2 million share session since December 14, 2017—just one week before Canopy Growth ultimately exploded 130% higher.

One way or another, Canopy is on the verge of a big move.

Canopy’s Other Symmetrical Triangle

In its short history, Canopy Growth has experienced another distinct, apples-to-apples ST formation. This instance occurred at the heights of Canopy’s first great bull run between November 2016-January 2017. Contrary to today’s reality, symmetrical triangle #1 had some key differences limiting its ultimate move forward.

For starters, trail-off volume erosion was significant higher as a percentage of peak volume. Aggregate volume was barely breaking 1 million shares/day by the time the formation was completely formed. This ST iteration was also smaller and shallower than we see today. As well, cannabis legalization was only in the conception phase at that point in the cycle. It wasn’t until April 13, 2017 when the Liberal government officially tabled the Cannabis Act, (otherwise known as Bill C-45).

We suspect there’s less investor trail-off today as cannabis legalization is much closer to actualization.

With that said, Canopy Growth still moved approximately ↑40% higher, peak-to-trough, before sellers took control. Although the move was significant, perhaps all the pieces weren’t aligned for a substantial move higher due to the cannabis sector’s position in the investment cycle. Still, if that’s a base-case scenario of what to expect, investors will gladly take it.

Final Thoughts

Investors in Canopy Growth are headed for some exciting times. I have no doubt the symmetrical triangle—or narrowing consolidation if you prefer—is coming to a head shortly. Unlike the similar ST experienced 18-months ago, Canopy Growth is entrenched in a preferable investment cycle stage: Canadian legalization has entered the late innings, rapid international expansion has commenced, and U.S./foreign legalization possibilities appear much more imminent. Very rapid sales growth is about to commence. As well, approaching dual-listing on NASDAQ may bring Canopy’s investment outreach to a whole new level.

Lest you believe elevated valuations will prevent any big move from happening, just remember bitcoin, Amazon.com, or any other of the myriad of unprofitable tech companies dotting the investor landscape. It’s a different industry, but cannabis stocks are still appraised on a hyper-future outlook of what could be—not rational price/sales or net income metrics used to value mature industries.

For some, not even that matters:

Traditional technical analysts lore states that symmetrical triangles break in concordant to the overarching trend 90% of the time. While that may or may not happen this time, betting against Canopy Growth is a dangerous endeavor. Just like previous early-stage industries with big growth potential, investors should be looking 5-years down the road instead of 6-12 months usually afforded mature industries. The cannabis sector will get there eventually, but in the meantime, taking the long view is likely the better play.

As such, we like Canopy’s chances here. The old-timers of technical analysis lore knew what they were talking about.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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