CGC Stock Goes From Bearish to Bullish in the Blink of an Eye

CGC Stock Goes From Bearish to Bullish in the Blink of an Eye
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CGC Stock: A Bearish Signal Averted

Very few sectors can provide the moves that marijuana stocks have been able to provide. Over the past few years, this sector has provided spectacular rallies followed by frightening sell-offs. These moves have been driven by emotions, specifically fear and greed.

The magnitude of these moves has given ample opportunity for both bullish and bearish traders to capitalize. For those who have been inclined to take a long-term approach, the good news has been that every frightening sell-off has always been followed by a spectacular rally wherein new highs have prevailed.

Canopy Growth Corp (NYSE:CGC) has done an excellent job of demonstrating this phenomenon. It has not been uncommon for Canopy Growth stock to produce returns of 500%+ and then suffer a correction, during which the stock price is halved.

These are very large and unnerving swings, but CGC stock has always eventually found its footing and achieved new highs. That’s why betting against this bullish trend has been a painful endeavor, proving that bullish trends can persist for a very long time.

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There is no question that Canopy Growth stock acts as a proxy for the whole cannabis sector. A few weeks ago, I was almost certain that this stock and its peers were likely to sustain further losses.

My beliefs were centered around an influential momentum indicator that looked like it was primed to generate a bearish signal. This influential momentum indicator is highlighted on the following stock chart.

Chart courtesy of StockCharts.com 

The focus of the chart above is the moving average convergence/divergence (MACD).

MACD is an indicator used to distinguish whether bullish or bearish momentum is influencing the price action in a stock. I place a lot of emphasis on this indicator because it helps me determine whether a stock is likely to advance or decline.

The reason is that momentum paves a path of least resistance. Bullish momentum paves a path of least resistance toward higher prices, while bearish momentum does the opposite.

For instance, the entire time that the bullish trend has been in development on the Canopy Growth stock chart above, the MACD indicator has been in bullish alignment, indicating that bullish momentum has been influencing the price action.

In early January, the signal lines that create a MACD signal converged, and it seemed as though a bearish MACD signal was going to be generated by month’s end. This would have indicated that CGC stock was likely to suffer more losses.

In the context of the technical price pattern highlighted on the below chart, lower stock prices made sense.

Chart courtesy of StockCharts.com 

This CGC stock chart highlights a price pattern known as an ascending channel.

An ascending channel is a technical price pattern that captures a bullish trend using two parallel upward-sloping trend lines.

These trend lines were created by connecting the peaks and troughs on the chart. They pinpoint where significant levels of price support and price resistance reside. Ultimately, this information can be used to time entry and exit points.

Beginning in November 2016, resistance outlined by the ascending channel has been tested over and over again. Each time it was tested, there was a sell-off afterward.

A test of support is long overdue. This is why, in early January, when it seemed like a bearish MACD cross was going to be generated, I was inclined to believe that price support was finally going to be tested.

Price support outlined by the ascending channel resides at $15.00, and it coincides with the previous high that was created in November 2016. The appearance of these coinciding levels of price support is why it made perfect sense to me that it was the optimal time for support to be tested.

Boy, was I wrong! CGC stock did not sell off—quite the opposite, actually. A relentless move toward higher stock prices quickly ensued, and the bearish signal I was so worried about was quickly averted.

The averted bearish MACD signal is highlighted on the following chart.

Chart courtesy of StockCharts.com 

The chart above illustrates that, over the course of three weeks, CGC stock has appreciated by a considerable amount: 52.35%, to be exact.

This rapid pace toward higher prices has caused the signal lines that create a MACD signal to pull apart from each other.

This is what is referred to as an averted signal, and it is very significant. A stock that refuses to generate a bearish signal is inherently strong. As a result, Canopy Growth stock is no longer in danger of generating a bearish signal.

This effectively puts to bed my bearish belief that CGC stock was likely to test $15.00. If anything, it augurs another test of resistance outlined by the ascending channel, which currently resides at roughly $75.00.

Analyst Take

Canopy Growth stock recently averted the generation of a bearish signal. Furthermore, indications on the stock chart continue to suggest that a bull market is in development.

As a result, I can only assume that higher CGC stock prices are on the horizon.