The Entire Marijuana Stock Sector Hangs in the Balance
Canada has gone and done it. Marijuana is now legal, so the question is, now what?
The reason why I am asking this question is because I get this feeling like marijuana stock investors are all standing in a crowded room, looking at each and wondering what is going to happen next.
Is this sector ripe for another rally or is there a much deeper correction in the cards?
We were warned by analysts and pundits for a countless number of months, even years, that this sector had become extensively overvalued and that a correction was a certainty. The problem is that those warnings fell on deaf ears because the sector continued to appreciate.
So is it different this time? Is this the moment where the music stops and the lights come on? Is this why it seems like investors are standing in a crowded room, gazing at each other, looking for answers?
The reason why I am asking all these questions and creating these fictitious scenarios is because I believe that a moment of truth is now upon us. I believe that the marijuana stock sector has reached a critical juncture, and what happens next will determine whether further gains are likely to follow or a deeper correction is in the cards.
For instance, Canopy Growth Corp (NYSE:CGC) is currently testing a very significant level of price support. This level of price support I am referring to is highlighted on the following CGC stock chart.
Chart courtesy of StockCharts.com
This Canopy Growth stock illustrates that CGC stock is currently testing a very influential level of price support that resides at $30.00.
This level of price support is earmarked by an uptrend line. The uptrend line was created by connecting the sequence of higher lows that were generated over the last 15 months.
This uptrend line captures the bullish trend that has been responsible for taking Canopy Growth stock from a low of $6.64 in August 2017 to where it currently resides at $33.74. This represents a 408.13% return in a 15-month time frame, and it does not even account for the all-time high of $59.25 set in October.
I am watching this uptrend line very closely because every time it has been tested, CGC stock has bounced right off of it and higher Canopy Growth stock prices have prevailed. This inability to trade below this uptrend line is why I have put so much emphasis on this simple metric. It is why I can say that as long as Canopy Growth stock is trading above it, I can only assume that a bull market is still in development.
Breaking below it, on the other hand, would negate all these assumptions. Instead, I would have to assume that the bull market in Canopy Growth stock has concluded and, as a result, lower CGC stock prices are likely to follow.
It is not only CGC stock that is testing a significant level of price support, there are many other stocks in this sector doing the exact same thing. Nothing captures this notion better than the Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ), which is highlighted on the following stock chart.
Chart courtesy of StockCharts.com
The marijuana stock sector ETF looks just like the Canopy Growth stock chart. There is an uptrend line has been supporting this ETF since June 2017, and it too is currently being put to a test.
That proves my point that it is not just CGC stock that is being put to a test. Instead, the entire marijuana stock sector now hangs in the balance.
What happens next will determine if the entire sector continues to appreciate or if a much larger sell-off is looming. This is why I have my eye on this sector, specifically on these uptrend lines.
The market conditions are not great at the moment, so this increases my concerns that the party may be over and the bullish trend is coming to an end. I do not want to jump to any conclusions, so I am just going to sit back and let the price action do the talking for me instead.
Canopy Growth stock and the entire marijuana stock sector are now being put to a test. Both CGC stock and the Horizons Marijuana ETF need to stay pitched above price support in order to maintain their bull markets. Failure to do so would have pressing consequences for the entire sector.