Aurora Cannabis Stock Technical Analysis: A Correction Is Imminent

Aurora Cannabis Stock
Credit: iStock.com/eskymaks

ACBFF Stock: Alleviating an Overbought Condition

The move over the past week in marijuana stocks has been breathtaking. Aurora Cannabis Inc stock (OTCMKTS:ACBFF) (TSE:ACB) has staged an incredible run towards higher prices, where ACBFF stock has tacked on 77.95% in six trading days. Bullish news surrounding this sector has been pouring in, satiating the appetites of investors.

This sensational move began after news that Constellation Brands, Inc. (NYSE:STZ) bought a stake in Canopy Growth Corp stock (OTCMKTS:TWMJF, TSE:WEED) for an undisclosed amount. This set off a flurry of speculation that other alcohol beverage companies might be inclined to do the same, given that marijuana is expected to disrupt their alcohol sales.

This was followed up by news that the Canadian government is only inclined to levy a $1.00 tax per gram (plus HST) on marijuana, which was translated as positive news as the Canadian government continues to make strides towards its commitment of a recreational marijuana market by July 1, 2018.

I am focusing on Aurora Cannabis stock because I have the inclination to believe that after such a substantial move, a correction in ACBFF stock is very likely, and I would not be surprised to see one occur as early as November 14, 2017. This may sound a bit contrary to the report I published on November 6, titled “Aurora Cannabis Breaks Out, Setting the Stage for a Move Toward $10,” so let me explain the implication of this correction.

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I continue to believe that a bull market in Aurora Cannabis stock is in development, but my concerns are stemming from the fact that an indicator I follow and respect has just become extremely overbought. When a stock reaches this point, it is highly likely that a correction will occur. Overbought sell-offs are usually quick and quite intense, but they do little to change the overall bullish picture.

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In order to better explain, let me illustrate the developments suggesting that higher prices are currently in development, while other indicators are suggesting that a correction is almost certainly likely to occur.

These indications are illustrated on the following Aurora Cannabis stock chart.

Aurora Cannabis stock chart

Chart courtesy of StockCharts.com

Let’s begin with the technical price pattern that was the focus of last week’s report when ACBFF stock was trading at $2.63.

The technical price pattern highlighted on the Aurora Cannabis stock chart is a symmetrical triangle. This price pattern is characterized by a series of lower highs and higher lows. The triangle pattern is best captured using two converging trend lines that are created by connecting the respective levels of lower highs and higher lows.

Symmetrical triangles are very powerful patterns and the power generated from these patterns is a result of energy being stored within the pattern as it develops. This stored energy is released when the stock price exits the pattern. The reaction that was just witnessed this past week is a testament to this statement.

My concerns are centered around the relative strength indicator (RSI), which is located in the upper panel of the stock chart. This indicator is an oscillator that determines whether an investment is overbought or oversold. An oscillator reading below 30 constitutes an oversold investment, while a reading above 70 constitutes an overbought investment.

My concerns stem from the notion that the RSI oscillator currently has a reading of 94.08, which is extremely high. I’ve rarely ever seen it reach such an extreme level. On the few occasions where I have witnessed such an extreme reading, a substantial correction followed.

I highlighted previous occasions when the RSI had similar extreme readings, and each and every time, it was followed by a correction. I do not see why this time will be any different for Aurora Cannabis stock.

This view that a correction is imminent is being reinforced by the volume spike that just occurred. This can be attributed to an emotional buying frenzy as everyone flocks to ACBFF stock in fear of missing out. Such instances are known to mark inflection points.

Let me reiterate, I am expecting a correction but am by no means saying that the bull market in ACBFF stock is finished. I fully expect that once this correction runs its course, the share price will find its footing and higher prices will once again prevail.

Analyst Take: 

After an incredible surge towards higher ACBFF stock prices, an influential technical indicator is suggesting that Aurora Cannabis stock has become extremely overbought and, therefore, a correction is extremely likely to occur. A correction such as the one that I am expecting is a necessary step in order alleviate the overbought condition that has been created. It is by no means suggesting that the bull market in this marijuana stock is about to end anytime soon.