CGC Stock: Patience is Warranted
The wild ride in marijuana stock continues. Unfortunately the price action since Wednesday of last week has been to the downside, and the likelihood that a blow-off top has been put in continues to grow. Canopy Growth Corp (TSE:CGC, CVE:CGC) stock is down 34.5% on the week and there have only been two days worth of trading.
I have been following this sector since mid-summer, as these stock began setting up a run to the upside. The premise that I believe is moving these stocks has to do with the anticipation of the recreational market that the government promised to legislate.
This is the classic “buy on rumor, sell on news” investment play and it is not over until that fateful day when the government outlines the details of how this new lucrative market is going to work.
If this premise is true, perhaps there is some fuel left in these stocks. But I have said it before and I will say it again: it is best to wait for a constructive pattern to develop before entering a position in Canopy Growth stock. The benefits of such a tactic are manyfold, and the ability to manage risk is the most important.
I have mentioned in my previous report that CGC stock, and other licensed marijuana producers like it, will need to find price support before a constructive pattern can even begin to develop.
The following Canopy Growth stock chart illustrates a possible level of support.
Chart courtesy of StockCharts.com
The CGC stock chart above illustrates a common tool used by traders. The Fibonacci retracement numbers (highlighted in green) are used to identify countertrend price objectives. In theory, when a stock pulls back from a primary trend, shares will retrace approximately 50% to 62% of the primary move. This zone usually offers support, as traders will be eyeing this area to enter long positions or cover short positions.
Traders and pundits have started using “the box” to describe this phenomenon. This box is highlighted above, and Canopy Growth stock has just entered it. In order for a constructive pattern to develop, CGC stock needs to find support around this area. Failing to find support could mean that a larger decline is developing, and it increases the odds that a blow-off top developed last week.
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The following Canopy Growth stock chart illustrates another metric that suggests support lies in this area.
Chart courtesy of StockCharts.com
The CGC stock chart above illustrates the constructive price action that has propelled this bull market to great heights. Looking at this short-term price chart, we can see that the price encountered resistance at $5.85 in early October, and it took three attempts before this level was finally broken.
When the price did break out, it quickly shot up to $7.30 before it paused.
This price action is constructive because CGC stock returned to backtest the previous level at $5.85 that stood as resistance, which is now a level of support.
The $7.30 price point is similar to the $5.85 price point, as it also took three attempts for the price to break through this level. Using the same premise from the previous breakout, CGC stock will be attempting a backtest at the $7.30 price point. I cannot say if this price will hold this level, but it is necessary if a constructive pattern is going to develop.
Bottom Line on CGC Stock
There might be some fuel in the tank for Canopy Growth stock based on the “buy on rumor, sell on news” mantra. I cannot say for sure if this is true, but what I do know for sure is that I would wait for a constructive pattern to develop before initiating a position. In order for a constructive pattern to develop, CGC stock needs to find price support first.