CannTrust Stock Hits a New All-time High: Breakout or Fakeout?

CannTrust-Stock-otcmkts-CNTTF
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CNTTF Stock: A Bullish Event, but Caution Is Warranted

The month of October is proving once again to be a volatile one, in terms of the stock market. The major market indices are in turmoil, having been struck by a round of selling pressure.

While this sell-off was taking place, marijuana-related stocks were bucking the trend. The selling pressure that inundated the markets did little to negate or break the sentiment in this sector.

Instead, marijuana stocks like CannTrust Holdings Inc (OTCMKTS:CNTTF, TSE:TRST) went on to forge new all-time highs. Breaking toward a new all-time high was a very significant event because, in order to do so, CNTTF stock had to break above a significant level of price resistance.

This level of price resistance is captured on the following CannTrust stock chart:

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Chart courtesy of StockCharts.com

The above chart illustrates that a significant level of price resistance resided at $10.25.

This level of price resistance was first established in January 2018 and, immediately afterwards, a violent correction followed. By April, the stock price had been halved.

In August, the marijuana stock market had regained its footing and began to stage an advance. This renewed enthusiasm for the sector put a bid into CNTTF stock and, as result, it began to appreciate alongside its peers.

By mid-September, resistance at $10.25 was being tested once again as the stock price had gone full circle.

On October 12, CannTrust stock broke above price resistance, suggesting that higher prices were likely to follow.

From a linear perspective, the range between price resistance and the lows that were set earlier this year can be used to create a potential price objective. This objective is obtained by taking the size of the range and extrapolating that value above the resistance level. Applying this theory in practice suggests that $15.00 is now a potential price objective.

The bullish implications of the break above price resistance are being reinforced by the technical signals captured on the following chart:

Chart courtesy of StockCharts.com

The wave structure and the moving average convergence/divergence (MACD), highlighted on the above CannTrust stock chart, are supporting the notion that higher prices are likely to follow.

This wave structure contains impulse waves and consolidation waves. These waves feed off each other in order to create and sustain a trend.

The waves highlighted in green on the above chart are impulse waves. In a bull market, impulse waves capture the stage in a trend when a stock sustains a progressive move toward higher prices.

The wave highlighted in purple is a consolidation wave. In a bull market, consolidation waves capture the stage in a trend when the price of a stock corrects. Corrections are important in the development of a trend because they create the conditions that are necessary for the next advancing impulse wave to follow.

On October 13, CNTTF stock exited the consolidation wave, completing it. The completed consolidation wave is suggesting that an advancing impulse wave is now in development.

The notion that higher prices are likely to follow via an impulse wave is being reinforced by the MACD indicator. MACD is a simple yet effective trend-following momentum indicator that is used to differentiate whether bullish or bearish momentum is influencing the price action in a stock.

A stock influenced by bullish momentum tends to appreciate, while a stock influenced by bearish momentum tends to depreciate. This is why impulse waves have been accompanied by bullish MACD signals and consolidation waves have been accompanied by bearish MACD signals.

The combination of the completed consolidation wave and the bullish MACD signal are reinforcing the implications suggested by the break above price resistance—that higher stock prices are on the horizon.

Even though the technical backdrop supports higher CannTrust stock prices, I have some concerns. They stem from the fact that recreational marijuana became legal in Canada today (October 17). This date has been the catalyst driving the cannabis sector, which is why it was the perfect candidate to trigger a selling event, especially if you believe in the adage of “buy on rumor, sell on news.”

Given the proximity of this breakout to the day that Canadian marijuana legalization came into effect, there is always the possibility that selling pressure will drive the share price back below $10.25 on a sustained basis. Such a development would indicate that the breakout was indeed a fakeout, and that a violent correction would likely follow.

Analyst Take

CannTrust stock has broken out, suggesting that higher prices are likely to follow.

This bullish suggestion is being supported by a number of technical indicators, but, given the current market conditions and Canada’s marijuana legalization, a fakeout should never be ruled out as a possibility. Which is why caution surrounding the CNTTF stock breakout is warranted in the days ahead.