CGC Stock Analysis: Keep an Eye on These Major Indicators

cgc stock analysis
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CGC Stock: Corrections Do Not Last Forever

Canada is gearing up for the recreational marijuana market that will be launched this fall, and investors are eager to see how this new segment of the economy will play out.

There has been so much enthusiasm for legalization that investors have already bid up the stocks that are most likely to benefit from the recreational cannabis market. This enthusiasm reached a fever pitch in January of this year, and the stocks that make up this sector have been correcting ever since.

But corrections do not last forever. In light of this, I am focusing on Canadian medical marijuana company Canopy Growth Corp (NYSE:CGC). That’s because I use Canopy Growth stock as a proxy for the whole legal marijuana sector. How this stock behaves is a telltale sign of how the sector will proceed.

I am currently watching the development of a technical price pattern on the CGC stock chart because a resolution of this pattern will dictate whether the stock is primed for higher or lower prices.

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Chart courtesy of StockCharts.com

The technical price pattern captured on the above chart is an ascending triangle, which develops when the price action sequence contains a static high and a series of higher lows.

Connecting the peaks and troughs created by the price action is how I captured this pattern. This process created two converging trend lines that depict a triangle.

These trend lines are very important because they pinpoint where price support and resistance reside, and the pattern will only be resolved when the stock breaks through one of these levels. Once that occurs, the price is expected to continue trading in that direction.

Bullish investors would love nothing more than to see CGC stock break above price resistance (which currently resides at $36.00) because that would unleash a powerful move toward higher prices. The reason is that triangle price patterns have the ability to store energy as they develop—and only release that energy when the pattern is resolved.

The ascending triangle is developing above the 200-day moving average. That moving average acts as a dividing line between stocks trading in a bullish state and stocks trading in a bearish state. When the share price is above the 200-day moving average, it is bullish; when the price is below the moving average, it is bearish.

The bullish state of Canopy Growth stock suggests that a bull market is still in development, which favors the outcome that bulls are seeking. The problem is that, on a standalone basis, one indication is not enough.

The ascending triangle pattern doubles as a consolidation wave, and its implications are captured on the following CGC stock chart.

Chart courtesy of StockCharts.com

This chart captures a wave structure and an influential momentum indicator that are known to create and sustain bullish trends. This wave structure consists of impulse waves and consolidation waves.

The impulse wave, which is highlighted on the above chart in green, captures the period in the development of a  bullish trend when a stock makes a sustained move toward higher prices.

The consolidation wave, which is highlighted in purple, captures the period in the development of a  bullish trend when a stock corrects and refrains from advancing.

This wave structure creates the stair-step price action that bullish trends are famous for.

The ascending triangle doubles as a consolidation wave. A bullish resolution of this pattern will imply that an impulse wave is in development and that higher stock prices are likely to follow.

If this bullish development is going to play out, the developing impulse wave needs to be accompanied by a bullish signal from the percentage price oscillator (PPO) indicator. This type of momentum indicator uses the crossing of a signal line to determine whether bullish or bearish momentum is influencing the price action in a stock.

Momentum is a very powerful force, which is why a sustained move in either direction cannot occur unless the applicable level of momentum is supporting it.

As you can see from the chart above, an impulse wave has been accompanied by a bullish PPO signal. Meanwhile, a consolidation wave has features of a bearish PPO signal. The PPO indicator is useful in confirming which wave is in development.

In order to suggest that higher Canopy Growth stock prices are developing via an impulse wave, the price needs to both break above resistance and display a bullish PPO signal. A move toward higher prices cannot sustain itself unless both of those signals are generated.

An attempt to break above resistance was made in June, but the price failed to do so, averting a potentially bullish PPO signal.

Analyst Take

I am watching the development of a technical price pattern chart and an influential momentum indicator on the CGC stock chart because I believe that these signals will suggest when the stock is ready to sustain its next move toward higher prices. When this happens, it will bode well for the entire marijuana stock sector.