Weedstocks Post-Legalization Direction Uncertain After Bears Deliver Wicked Counterpunch

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We all should have known it wouldn’t be this easy. With Canopy Growth Corp., Aurora Cannabis Inc., and HMMJ all reaching record highs on Monday, the market did what it does best: bait-in fresh risk capital at the most inopportune times. Unfortunately for unwitting investors, institutions used Tuesday’s pre-market/on-open euphoria to hammer bids mercilessly, causing enough technical damage to leave Wednesday’s first post-legalization trading session very much in doubt.

Heading into Tuesday, everything was seemingly ripe for continued upside momentum. Both co-leaders in the space—Canopy Growth Corp. and Aurora Cannabis Inc.—experienced record highs. So to did sector benchmark Horizons Marijuana Life Sciences Index ETF (HMMJ), which closed in uncharted terrain. Most weedstocks gaped-up precipitously in the pre-market, with names such as Cronos Group Inc. and Tilray Inc. gaining 10% and 7%, respectively. The Dow Jones Industrial Average surged 400 points for good measure. Continued upside extension in the cannabis space seemed primed.

Horizons ETFs Management (Canada) Inc CEO Steve Hawkins discusses the Horizons Marijuana Life Sciences Index ETF (HMMJ) and its holdings

Then it happened. Canadian cannabis stocks disintegrated right off the opening bell, with most majors losing double-digits in percentage terms within minutes. The selling was so vicious that circuit breakers triggered on Aurora Cannabis Inc., briefly suspending trading in the stock. This selling event was certainly no garden-variety affair, as Canopy Growth generated its heaviest on-open buy/sell activity in at least two months.

And that, in essence, is the primary problem bulls face on Wednesday. Had the cascade selling been limited to just a temporary sell-the-gap correction, the bullish case would be more compelling. Unfortunately for buy-side investors, most weedstocks finished near the session lows, unable to gain any traction throughout the day.

Thus, we enter Wednesday’s big day at a little bit of a technical crossroads. The rally in most major Canadian weedstocks is still technically intact, but the runway is getting short. Some key mid-majors like OrganiGram Holdings Inc. and Namaste Technologies Inc. sold-off the whole session without pause, which is exactly what doesn’t happen in bull market conditions. Although price action can change quickly, the voracious selling and tepid recovery doesn’t exactly scream “momentum” entering legalization day.

Turning to the charts, Canopy Growth (CGC)—as always—should provide the most reliable proxy for how the sector reacts. There are fairly clear and discernible technical levels traders will be watching off the open. Bears will be gunning for Tuesday’s lows of $51.26/share—which if breached early on above trend volume—should bring $50.00-50.32 into play quickly. Bulls will be eyeing a strong hourly close above $55.44 as a springboard for additional upside momentum. There isn’t much chart resistance until about $57.00/share should that level give way. Relative strength indicators are neutral on all time frames.

Key levels on HMMJ are straight-forward as well. A closing print on the hourly below $24.59 would signal continued weakness. A closing print above $25.66 on the hourly would support continued bullish price extension. As always, volume must chime-in above trend to validate any such signal.

In terms of sector trend, that, in a nutshell, is what you need to know. Except for brief intermittent periods of time (i.e. when Tilray melted up towards $300.00/share in September), Canopy Growth continues to be the straw that stirs the drink. From a more broad-based cannabis perspective, HMMJ is the best proxy indicator to follow. All eyes will be on these two equities as market participants attempt to gauge the market’s pulse as Canada’s inaugural post-legalization finally arrives.

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