Marijuana Stocks: This Chart Is Bad News for Canopy Growth

Marijuana StocksCanopy Growth: Have Marijuana Stocks Finally Topped?

Marijuana is set to become legal in California, which is big news for marijuana stocks like Canopy Growth Corp (TSE:CGC, CVE:CGC).

This is all just speculation until the California State government finally releases the details surrounding marijuana legalization and how consumers will be able to obtain it for recreational purposes. It is this exact premise that has caused a bullish tailwind in Canopy Growth and similar marijuana stocks.

These stocks could continue to rise until the government finally comes out with these details. This was the premise behind this trade, as investors are buying the rumor in anticipation of selling the news.

Marijuana stocks have been gaining quite the attention is recent weeks, and it has sent the investment community into a buzz. I am starting to see similar price behavior surrounding this sector that resembled the mania of the dotcom bubble. This entire sector is catching a bid, and any name that has anything with marijuana is surging. Volatility is the order of the day.

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The price action on Canopy Growth stock was very constructive going into this week, as tradeable patterns continued to emerge, but the price action on Wednesday has left me wondering if a blow-off top has just occurred in this name and others like it.

The following Canopy Growth stock chart illustrates the constructive price behavior.

cgc

Chart courtesy of StockCharts.com

The Canopy Growth stock chart illustrates that the move off of the September lows was constructive. Healthy constructive charts are made up of impulse waves that take a price higher and consolidation waves that digest the surge in price. These waves also serve to alleviate any overbought conditions that may exist. Consolidation patterns are also the patterns that set up the new impulse wave.

An impulse wave took Canopy Growth stock to $3.50, and then shortly afterwards, a golden cross was generated. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is on the horizon, and this was the first signal that indicated a bullish move in CGC stock was brewing.

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The next nine months were spent completing a triangle consolidation pattern. These consolidation wave patterns contain two converging trend lines. One line represents resistance and the other represents support. As these patterns progress, momentum is being built. As a result, triangles are very special patterns that are notorious for their powerful breakouts.

In late July, this triangle consolidation pattern broke to the upside, and the rally in Canopy growth stock began to accelerate. Impulse waves and consolidation waves began to develop, and the time between them began to shrink considerably.

Two months after the breakout from the first consolidation wave, CGC stock had effectively doubled, and this was only the beginning.

The following Canopy Growth stock illustrates the acceleration of the trend.

cgc2

Chart courtesy of StockCharts.com

The CGC stock chart above looks similar to the previous one I posted, except for two factors. The chart above is only two months in duration, and I had to switch to a log-based scale in order to illustrate the trading action in October.

Since the beginning of October, Canopy Growth stock had effectively quadrupled when it reached a high of $17.86. This is referred to a parabolic move in which the price accelerates higher. Parabolic trends cannot be sustained. When a price blows off, it is typical to see the type of price action that was witnessed on Wednesday.

Canopy Growth stock opened the trading day at $13.84, and proceeded to hit a high of $17.86. Shortly after this, high selling ensued and CGC stock hit a low of  $9.75, and it finally closed the day out at $11.40. This is what a blow-off top technically can look like.

Trading volume also spiked, indicating that emotions were extremely high and that speculation in CGC stock may have reached a climax.

Bottom Line on Canopy Growth

The premise that drove Canopy Growth stock to great heights is still in play, but the price action is suggesting that some sort of peak has been reached. Whether this peak is temporary has yet to be seen. If I were looking to get into CGC stock, I would wait for a consolidation wave to develop.