Aurora Cannabis Inc. (ACB.XTSE) shares moved more than 3% lower during Monday's session after Cronos Group Inc. (CRON) sold its stake in Whistler Medical Marijuana Aurora for C$175 million in stock. While management expects that the strategic acquisition will add significant value, investors are concerned about potential dilution from the all-stock deal.

Melius Research analyst Rob Wertheimer started coverage on Aurora Cannabis stock with an Overweight rating and a price target of C$17 per share, calling it his top pick in the cannabis space. While the analyst firm anticipates overcapacity issues in the future, Wertheimer notes that Aurora has taken measures to capture market share while lowering production costs to preserve margins.

The industry faces a lot of uncertainty at the moment. While Canada legalized adult use and medical cannabis last year, analysts are divided about whether the market will be oversupplied in the not-too-distant future. Scientists at the University of California Berkeley also successfully created cannabis compounds in a lab rather than harvesting them, which could open the door to alternative production methods.

Technical chart showing the share price performance of Aurora Cannabis Inc. (ACB)
StockCharts.com

From a technical standpoint, the stock could be making a bearish head and shoulders chart pattern. The price stands near the critical shoulder line, where a breakdown could signal the start of a prolonged downtrend. The relative strength index (RSI) appears neutral at 50.01, but the moving average convergence divergence (MACD) remains bearish. These indicators suggest that the stock could see some downside ahead.

Traders should watch for a breakdown from the shoulder line at around $7.11 per share, which could lead to a move down to S1 support at $6.70 or S2 support at $5.84. If the stock rebounds from these levels, traders should watch for a move to retest reaction highs of around $8.50, which would invalidate the bearish head and shoulders chart pattern. 

The author holds no position in the stock(s) mentioned except through passively managed index funds.