The cannabis sector has had a very tough three months. However – this string of weakness has created one of the best opportunities in the last four years. Today I am going to explain what is happening – and show you a chart pattern that has led to enormous gains in the last few years.
After almost doubling in the first three months of the year, the ETFMG Alernative Harvest ETF (MJ) is down 25% from the 52-week high.
Take a look below at the rally early in the year and the decline the last few months.
Although cannabis stocks are still up nicely in 2019 – the recent decline was driven by a few key factors.
- Short-term profit taking after a big surge higher in early 2019.
- Canadian cannabis sales have been slower then expected since Canada went legal in October of 2018.
- Concerns over the US department of justice blocking merger plans for a few cannabis mega deals.
- Long-time Canopy Growth Corp CEO Bruce Linton being fired.
- Canadian cannabis company CannTrust being busted for illegal grow activities.
This stretch of weakness has been challenging. It has lasted for over three months and many shareholders are asking if this is the beginning of a bigger sell off?
Here’s my take on what’s next.
I believe this recent bout of weakness has created one of the best buying opportunities in years – and I am going to reveal a chart that proves it.
Canopy Growth Corp (WEED, CGC) is the largest cannabis company in the world. Canopy is a clear industry and sector leader.
In some very unexpected news – long-time Canopy CEO and founder Bruce Linton was fired last week by Constellation Brands (STZ) – a company who basically controls the Canopy Board after investing $4 billion in August of 2018.
Constellation will not install a hand-picked CEO that will help take Canopy to the next level.
In the long run I think this CEO transition is great news. It sets the stage for Canopy to continue its expansion.
But in the short run, Canopy shares are under pressure, falling 35% in the last three months.
That decline has created a great opportunity.
Canopy shares are the most oversold in four years.
The Relative Strength Index (RSI) below the chart, a technical indicator that measures when a stock is oversold or overbought, is at its lowest level since August of 2015.
Since then Canopy has rallied 2,842%.
Take a look at the huge rally and gains below.
I’m not predicting Canopy will rally another 2,842% in the next four years. But the relative strength index is sending an important message. It tells me that Canopy is much closer to a short-term bottom than a short-term top. It also tells me that for long-term investors this is potentially an attractive entry point.
Looking forward I still see plenty of growth ahead for Canopy. I am expecting shares to stabilize, rebound and head back to the high.
If anyone has questions please fell free to contact me: mike@vodickagroup.com
