The cannabis sector is about to test its make-or-break level. It may either succeed in which case the sector will become ultra bullish in the remainder of 2019. Alternatively, if it fails, it may become ultra-bearish in 2019. This is based on the sector leader which is Canopy Growth (WEED.TO). Our Canopy Growth forecast was bullish but provided it trades within its rising channel. Even though we favor a bullish outcome because the fundamentals of the sector which we outlined in Canada’s cannabis stock forecast we must always remain open to a change a prior prediction.
One of the important principles we apply is that sector leaders should be watched closely. As per our 100 investing tips
In order to identify the most juicy investment opportunities in each year investors must pay attention to a wide range of sector leaders. They lead their sector higher and lower. The sector leader tends to get a bid first, but also get sold first. The real value that sector leaders provide is following closely relative strength, breakout and breakdown points to understand which sectors will provide the highest potential.
Especially the last sentence is the one that is crucial here.
No matter how convinced anyone is about a future price trend it is always subject to change, even if the probability is just less than 5 pct.
If we apply this to the cannabis sector we see that Canopy Growth is about to test its make-or-break level. This is an ‘event’ with an above average importance. It’s the #1 thing to watch in the sector in the next few weeks.
Logically, two things may happen:
- Either rising support is respect in which case wee a quick and easy rise from $50 to 90 in the months to come.
- Either the price of Canopy Growth falls through rising support in which case it will be very bearish for the sector.
We tend to believe the first scenario is about to materialize.
Why?
Because of several reasons:
- The fundamentals of the sector keep on improving. Legally, the door is open for increased demand in the sector. The medical usage of cannabis is being promoted with a very high level of innovation.
- Capital is flowing massively to the sector.
- Earnings of top cannabis companies continue to improve significantly.
- The chart of Canopy Growth suggests a normal retracement in the context of a strong bull market, nothing concerning at all about this.
We will know in a few weeks from now whether our assessment was right. In case we are proven right investors should massively buy this sector, especially the quality names, because much higher prices will be underway!
