Canopy Growth Corp (TSE:WEED) Skirts Bear Market Territory; Stages Encouraging Rebound

Benjamin A. Smith
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Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) slide continued on Friday, briefly edging it into bear market territory within 4-days from the October 15th high. Although some obvious technical damage on the daily has occurred, an encouraging close brings preliminary optimism that the stock’s nasty bearish impulse may be waning.

Despite an early session pump by CNBC’s Jim Cramer—which saw Canopy Growth jump almost three dollars within minutes—CGC faded quickly thereafter.

“Faded” is perhaps putting it mildly. The drop was actually a 4-hour-plus cascading snowball down an steep cliff, picking up strength as additional buy stops busted out. By the time it ended, Canopy Growth fell almost $6/share from Cramer’s morning pump highs. The share dump also—albeit briefly—placed CGC into bear market territory, defined as a ↓20% decline, peak-to-trough, from the stock’s high close on October 15th. That detail was something we tracked in advance, and it ended up being $0.07 away from the low print of the session:

While there’s few silver linings in the overall price action, some notable late-session buying—combined with robust support underneath—may prelude a significant bull stand beginning early next week.

Our first presentation is a simple one. For the first time in four sessions, bulls were able to seize control to close out the day. While the ascension was rather modest (around 3.10% off the lows), it did manage to close above the technically-important $46.50 level, which was the October 5th & 11th base consolidation lows. It also regained the 50-Day simple moving average ($46.10), an important short-term momentum proxy. The re-establishment over these levels will force bears to expend additional energy to seize back lost ground. This brings into question how much ammunition they have left after CGC’s steep decline, on lack of negative news catalyst.

Supporting this assessment is the stock’s immediate volume profile. From the chart above, we glean that CGC has had four straight declining volume days, which is not supportive of further downside extension with several solid support levels residing just below. The last two sessions have chimed-in below trend. The last time Canopy Growth had four straight red candles was late-June, and on the fifth day, prices rallied ↑10.97%. The time previous to that, Canopy Growth fell ↓3.04% on the Day 5, before rallying ↑24.49% over the next week. Recent history, it appears, is on Canopy’s side.

Also consider the qualitative viewpoint as it pertains to short interest. With anywhere from 6-10% of the shares outstanding short on CGC (mid-October numbers not available yet), is it more likely short sellers press their luck—with robust support beneath current levels, the Constellation Brands deal closing shortly, and rapidly declining daily volume? Or is it more likely shorts start covering, thus acting as a tailwind on price? I believe the odds asymmetrically favor the latter.

Final Thoughts

The wildcard in Canopy Growth’s rebound equation—and by extension, the sector—is the broad market indexes, which seem to exert an uneven effect on cannabis stocks. However, with both the S&P 500 and NASDAQ both engaged in tightening ranges on the hourly time frame, I believe there’s enough runway for cannabis bulls to make an early week defense. Should broad market consolidation turn upward, cannabis bulls will have key sustained impetus in which to recover lost ground.

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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