Canopy Growth Corp: This Determines If CGC Stock Will Fly

CGC StockCGC Stock: Bullish Potential

I can’t even begin to count the number of conversations I came across this holiday season with regards to marijuana stocks and the potential surrounding this sector.

I recently wrote a report on Canopy Growth Corp (TSE:CGC, CVE:CGC) stock in which I outlined the signals that are now suggesting that lower prices are set to prevail. The problem with this outlook is that it goes against the premise that I believe is fueling the move in this entire sector.

I have stated numerous times that I believe that the bullish run in CGC stock and the other licensed producers in this sector will continue until the government finally announces the framework regarding recreational marijuana. Such an event causes a “buy on rumor sell on news” event.

These conversations have caused me to revisit the price chart of Canopy Growth stock and apply what I would need to see in order to say that a constructive pattern has developed and that a bullish run can proceed.

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To start, I would like to go over the indicators that suggested lower prices were set to prevail. The following Canopy Growth stock chart illustrates the signals that indicated a bearish view was warranted.

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Chart courtesy of StockCharts.com

There are two key indicators on the CGC stock chart above that suggest that lower prices could be in the cards.

The first indicator comes in the form of a broken uptrend line. This uptrend line was created by connecting the troughs on the price chart. This trend line supported the price of CGC stock as the trend toward higher prices accelerated.

Now that the price has fallen below this trend line, I can only presume that lower prices are set to prevail because support has fallen.

The second indicator comes from the top panel on the chart above, labeled “RSI.” The Relative Strength Index (RSI) indicator is an oscillator that is used to measure overbought and oversold conditions.

In a bull market, it is common for the RSI indicator to oscillate above 50 when the price is trending higher. The current drop below 50 is suggesting that the price advance is now complete, and that weaker prices can be expected before CGC stock can once again regain its footing.

These two indicators have swayed my views toward the bearish camp, but a constructive pattern can still develop.

The following Canopy Growth chart illustrates a constructive outlook that could negate my bearish view.

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Chart courtesy of StockCharts.com

The CGC stock chart is an excellent example of healthy bullish price action. Healthy price action consists of impulse waves that take a stock price higher, and consolidation waves, where the new higher prices are digested.

Consolidation waves are essential in a healthy trend because they alleviate any overbought conditions that may have developed, and set up the next prevailing impulse wave.

The impulse waves are highlighted in green in the chart above, and the consolidation waves are highlighted in purple.

Even though the uptrend was broken, the current price action could still be within the confines of a consolidation wave. In order for the pattern to become constructive, CGC stock would have to close above resistance outlined by the consolidation triangle, which currently sits at $9.80.

The moving average convergence/divergence (MACD) indicator in the lower panel is converging, and a bullish signal would coincide with a move above resistance. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals.

A bullish cross would indicate that bullish momentum has once again overwhelmed any bearish momentum, and that the path of least resistance is higher, as the bulls are once again in control.

A bullish resolution in Canopy Growth stock is quite possible, and higher prices are needed to set those wheels in motion.

Bottom Line on Canopy Growth Stock

I am still sitting on the sideline, waiting for a constructive pattern to develop CGC stock. Even though some signals have rolled over and trend lines were broken, a constructive pattern can still develop if Canopy Growth stock can close above the resistance that is outlined above.