Canopy Growth Corp (TSE:WEED), Aphria Inc (TSE:APH) Early Session Rally Fails; Further Capitulation Ensues

Benjamin A. Smith
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After the cannabis sector’s massive selloff yesterday, Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1) and Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) had another shot to make amends. With both stocks trading at key inflection points, bulls had an opportunity to stabilize the sector by holding the line above important technical levels. While a valiant attempt was made at the open to accomplish just that, selling was simply too powerful. The result: yet another wave of intense selling and further technical damage.

After gapping down marginally below its 100-Day MA ($27.66), Canopy Growth raced higher on a flurry of plentiful buy orders. In the first five minutes of trade, prices jumped $1.50 to reach a session high of $28.80/share—well above the important 100-Day MA level. For a fleeting moment, it looked like the sector might get a well-needed reprieve.

Canopy Growth Corp, the world’s largest cannabis company by market cap, and CEO Bruce Linton, are considered the ones to watch in the global marijuana industry. Here he joins James to talk about Canopy’s own global rollout strategy.

Alas, it wasn’t to be. What followed was a crafty slight-of-hand; otherwise known as a “bull trap” in the trading world. With fresh bottom-picking money entering on the open—enticed by what appeared to be a defended technical level—the subsequent ‘100’ breakdown and long U-turn selling added further kerosene to the fire. It was akin to a teenager chair-pulling prank, in which the unsuspecting victim crashes to the floor. The sell-side market suckered bulls in, then pulled the chair.

Much the same phenomenon occurred with Aphria this morning. While the 200-Day MA gave way yesterday afternoon, a key area of support encompassed the previously defended gap-up retest of the $10/share level in December 2017, to the $10.58 level marked by the 200-MA breach. Any hold above $10/share would have been seen as a ‘win’ in the eyes of investors. Keep in mind, Aphria is severely oversold, having closed down 10 straight sessions (prior to today), shedding ↓27.16% in the process.

And just like Canopy Growth, investors were greeted with a whiplash fake-out which sucked in new longs that wished they would have waited a little longer.

Watch Aphria CEO Vec Neufeld outline his company’s international strategy with the acquisition of Nuuvera, which he said it will rename Aphria International

After reaching a high water mark of $10.34/share in the opening minutes of trade, prices plummeted to a low of $9.10/share on very heavy volume. While Aphria investors made a valiant attempt to hold the support area, they were simply swamped by sell orders. Again, the renewed plunge not only flushed out longer term investors tired of unending ‘max pain’ conditions, it also forced short-term dip buyers into frenzied market orders as the support zone collapsed.

The support zones in each case were defended, but sellers brought a bigger bazooka to the shooting range. With the S&P/TSX Composite Index (INDEXTSI:OSPTX) at 2-month lows, and the Dow Futures down 500 points pre-market, sellers were simply better armed to win another battle.

Canopy Growth, Aphria Pare Losses

After this morning’s capitulation, both stocks showed signs the hemorrhaging was abating. This helped pull the rest of the sector back up, with cannabis stocks—on aggregate—finishing where they began.

Canopy Growth managed to rally about $2 off the low—actually re-testing its 100-Day MA on three separate occasions to finish with minimal losses. Volume was rather tepid, making it hard to get overly excited about the move. Still, with sell-side volume noticeably collapsing, it gives investors hope that the worst of the neat-term selling is behind them.

The exact same dynamic occurred in Aphria shares. The early session capitulation gave way to tepid buying on grinding volume. The bulls weak attempt to test the underside of support died at $9.90 on the first attempt. But following Canopy’s lead and a burst of on-close buying, Aphria pierced the $10/share mark and closed just under this key technical level. This was the eleventh straight red close for Aphria shares.

In both instances, a seller’s strike allowed bulls to take control. Given the lack of volume conviction, it’s hardly the stuff true bottoms are made of. Still, the reversal of price action is welcome news for investors desperate for any semblance of good fortune.

Looking Forward

With sentiment broken and technicals across the whole sector in utter disarray, the first order of business for bulls is finding a bottom. While some form of notable rally is likely, don’t expect an imminent, powerful V-bottom rally to erase most of the losses.

More likely—with much of the heavy selling out of the way—volume will begin easing lower and newly-established ranges will form. With discounted future cash flow metrics getting into the ‘interesting’ zone for select cannabis companies, we doubt investors who’ve held through the carnage will exit now. This doesn’t necessarily apply to everyone in the sector. But for the biggest 5 or 10 players, it’s hard to envision more heavy selling forthcoming into these grossly oversold conditions.

Looking forward, the cannabis sector is in desperate need of a defining catalyst to get institutional money fired up. Whether that comes from Bill C-45 third Senate reading passage (without amendments) on June 7, The Green Organic Dutchman IPO (TGOD) performing better than expected, or another large industry merger is unclear. However, all the euphoria generated since 2016 has completely given way to question marks pertaining to valuation, supply gluts and legalization timelines.

For momentum to start shifting again, a market needs a catalyst—that much is clear. An abundance of Tier-2 distribution agreements, private acquisitions and general press release filler simply won’t cut it.

Stay tuned. We suspect the market will not disappoint.

 

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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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