Canopy Growth Stock Eyes Breakout Ahead of Canadian Legalization

Canopy Growth Corporation (CGC) shares rose more than 8% in early trading on Monday as Canada gears up to legalize recreational cannabis on Oct. 17. The company also announced the acquisition of the hemp research firm ebbu, which could lower the production cost of its cannabidiol, or CBD, and pave the way toward cannabis-infused beverages.

Many other cannabis stocks also moved higher early during the session, including Aurora Cannabis Inc. (ACBFF) and Tilray, Inc. (TLRY). Investors are betting that cannabis companies will experience more demand than they can handle on Oct. 17, which could translate to sharply higher revenue and more reasonable long-term valuations based on the growth.

In an interview with the Financial Post earlier this month, Canopy Growth CEO Bruce Linton predicted that there would be "no chance" licensed cannabis producers would meet consumer demand on the first day of legalization. He speculated that supply and demand wouldn't equalize until 2019 and 2020 as existing companies increase production and new companies are approved.

Technical chart showing the performance of Canopy Growth Corporation (CGC) stock

From a technical standpoint, Canopy Growth stock appears ready to break out from a symmetrical triangle chart pattern. The relative strength index (RSI) appears neutral at 61.93, but the moving average convergence divergence (MACD) could experience a bullish crossover in the near term. These indicators suggest that the stock could have room to run if it breaks out.

Traders should watch for a definitive, high-volume breakout from upper trendline resistance and prior highs near R1 resistance at $56.60 to R2 resistance at $64.56. If the stock fails to break out, it could see a move lower to retest lower trendline and pivot point support at around $48.64. There could also be some profit taking on Oct. 17 if traders "sell the news."

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

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