Canopy Growth Corp (NYSE:CGC) Direction Remains Unclear, But Actionable Move Imminent

Benjamin A. Smith
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A material move in Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) stock—and by extension, the market—is expected early next week. Unfortunately, the direction of the break is seeded with considerable uncertainty—flanked by both bullish and bearish anecdotes in both directions. We review the price action pros and cons, as investors await to deploy capital on the material move sure to follow.

To a large degree, the technical picture hasn’t changed all that much since we provided Canopy Growth’s in-depth technical picture early Thursday morning. As expected, CGC is developing a tightening range pattern, making for definable lower-highs and higher-lows on most time frames. We’re now at the stage where prices are essentially hemmed-in, and a new trend must emerge shortly. There is no such thing as flatlining prices in the stock market’s most volatile sector.

Beginning with the positives, CGC is forming a positive divergence from the broad market indexes. While I would classify this price action as ‘tenuous’, it’s nonetheless supportive to bullish upside should the indexes stage a turnaround. At 8.20 million shares traded on Friday, volume chimed-in at the lowest levels since bears manifested themselves on October 16th. If additional downside extension does occur, it will require: 1) bear volume re-grouping, 2) continued broad market declines, 3) a convincing bear break below the Constellation Brands rough buy-in price of C$48.60/share (October 25th, 26th lows), and 4) a convincing take-out of the October 23rd gap-down lows.

Could all four events transpire early next week? Absolutely. But given where prices have come from on absolutely zero material change in sector outlook, that will be a tough feat. The wild card, of course, are the broad market averages. However, it’s worth nothing that all three major indexes (S&P 500, NASDAQ, DJIA) broke new lower-lows on the morning session hourly on Friday, only to finish above them on-close.

We also note that several of Canopy Growth’s ancillary peers are showing constructive price action—perhaps foreshadowing CGC’s move to come. Namaste Technologies decisively broke its October 23th rebound lows Thursday, after announcing a full over-allotment of its $51.75 million bought deal financing. Another beaten-down Canadian midcap—Emerald Health Therapeutics—did the same in a midday Friday surge, breaking the predominant downtrend. Hexo Corp. is another stock threatening such an outcome, as insatiable Quebec demand for cannabis shows no let-up nine days into legalization.

Lastly, there may be another imminent catalyst supportive to a rebound in cannabis stocks. On November 6th, cannabis legalization goes before the voters in a number of states. Michigan and North Dakota voters will decide statewide measures on adult-use legalization, while Utah and Missouri will consider medical marijuana initiatives. Still others such as Ohio and Wisconsin will contemplate smaller reforms which will pave the way for future cannabis ballot expansion.

It is likely that more cannabis-friendly results will materialize than not. Although Canadian LPs don’t own any horses in this race, they should benefit from positive sentiment tailwinds that would result from affirmative voter outcomes.

Bears Still In Control of CGC

While the bull case for Canopy Growth seems fairly compelling, we can’t forget that this bearish impulse remains very much a dominant force. While CGC is developing positive divergence from SPY (see above), it’s delicate. In the end on Friday, CGC/HMMJ fell in-line with the S&P 500 (↓1.76%), eroding steadily as the session advanced. Another weak SPY performance or two could easily shatter the positive divergence completely.

In fact, CGC isn’t even above the midpoint of its consolidation range between $36.62-$42.43. While the Constellation Brands C$48.60 purchase price equivalent and bear impulse low ($36.62) remain formidable backstops, the fact remains than bulls have done nothing to change directional control. Lower-highs are angling-down on a much steeper gradient than higher-lows presently, placing bulls on the defensive.

Also consider that for every Canopy Growth peer showing constructive price action, just as many are not. Aurora Cannabis, Cronos GroupGreen Organic Dutchman Holdings and Tilray Inc. look downright sickly, with all threatening consolidation range bear breaks. Of course, this can change quickly if CGC takes initiative and begins trading higher. But the ultimate fact remains: there’s little evidence to indicate that HMMJ basket stocks are working in unitary fashion to halt the bearish slide.

Final Thoughts

Right now, the next move in CGC’s/HMMJ’s tightening range could go either direction, with equally compelling arguments on both sides.

One aspect favoring the buy-side is Canopy Growth’s risk/reward profile, which, in our view, heavily skews upward. If CGC holds the psychologically-important $37.35-37.45 area on Monday—via no-challenge gap-up or re-test—bulls could have their launch point to push prices higher towards $40.37, and ultimately the key $42.49 level, quite quickly. If $37.35 gives way early & convincingly, I’m not sure I would even stick around to see if $36.62 can stage a successful re-test. At that point, the odds of bulls seizing near-term control would take a very material hit.

Either way, the inflection point is coming to a head early next week, resulting in an actionable and investable decision point. Midas Letter will exact further coverage as Canopy Growth’s directional impetus becomes clear.

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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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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