May was a tough month for cannabis stocks. However, here’s the upside – It has also created one of the best buying opportunities in two years.
In fact, I think the largest cannabis stock in the world has a high probability of a big rally in the next few weeks and months.
The North American Cannabis Stock Index fell into a bear market in May, dropping 20% from the monthly high. The index is now down 23% from the 2019 high set in late March.Take a look at the decline in the chart below.
There’s no question this kind of short-term volatility is nerve wracking for cannabis investors. However, here’s the good news – The cannabis sector is now the most oversold its been in two years and history clearly shows that a huge rally could be right around the corner.
This Chart Should NOT Be Ignored
Canopy Growth Corp (WEED, CGC) is the largest cannabis company in the world.
Headquartered in Canada, Canopy is an early industry leader with a clear history of leading the entire cannabis sector higher. According to the relative strength index (RSI), a technical indicator that measures oversold and overbought conditions in stocks, Canopy has been at this oversold level three times in the last two years. Every time the Canopy RSI was at this level, it has triggered an enormous rally.
- June 6, 2017 to January 10, 2018: 520% rally
- July 20, 2018 to October 15, 2018: 110% rally
- October 30, 2018 to April 29, 2019: 70% rally
If Canopy rebounds out of this bear market – and I expect it too – I believe Canopy will deliver one of its biggest rallies ever. Here’s why – Canopy has tested this all-time high area between $65 and $70 almost ten times in the last year. This has created an enormous pennant formation, a chart pattern that frequently leads to an upside breakout and new all-time high.
Technical analysis isn’t an exact science – I’m not calling this as the dead low for Canopy or a mega rally today or tomorrow. But these charts tell me that Canopy is very close to the bottom of this down move. And historically this looks like an excellent time to buy, particularly for long-term investors.
Cannabis Stocks are Moving into a Seasonally Strong Time of Year
Here’s another factor to consider. Late spring and summer is a seasonally strong time of the year for cannabis stocks and Canopy in particular. Canopy rallied big in June of 2017, and then it proceeded to rally big again in June of 2018.
Right now, I see this same setup happening with a big selloff in April and May and the relative strength index near a 2-year low.
The Big Picture
May was a tough month for the cannabis sector. But that weakness has actually created an opportunity to buy while shares are down. Canopy Growth Corp, the largest cannabis company in the world, is close to the most oversold its been in two years – and historically these conditions have led to big rallies and a great time to buy.
Michel Vodicka owns shares of Canopy Growth Corp (CGC).
About the Author
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.