Cannabis Stocks Skyrocket in a Landmark Week

Publicly traded cannabis companies experienced a significant surge this week, driven by two pivotal events that could accelerate mainstream adoption of marijuana. First, Dow component The Coca-Cola Company (KO) revealed ongoing discussions with Vancouver-based Aurora Cannabis to develop a CBD-infused beverage, offering access to the non-psychoactive yet therapeutically promising cannabis compound. Second, the U.S. Drug Enforcement Administration (DEA) shifted its longstanding strict stance, announcing an agreement with Tilray, Inc. (TLRY) to import cannabis for medical research purposes.

Canada is set to legalize marijuana nationwide on October 17, igniting rapid industry growth north of the border and increasing U.S. interest in legal cannabis imports. Vancouver's Tilray debuted on Nasdaq in July, joining Toronto-based Cronos Group Inc. (CRON) and NYSE-listed Canopy Growth Corporation (CGC). U.S. investors can also access cannabis stocks via pink sheets and the ETFMG Alternative Harvest ETF (MJ), which prominently features major Canadian cannabis companies.

Historically, many inexperienced investors are hopping onto the cannabis rally, mistaking it for the next bitcoin or internet boom. These low-float stocks often exhibit wide bid/ask spreads and heightened volatility, exacerbated by novices lacking risk management throwing funds at trending plays. Unfortunately, many will learn the hard way as sophisticated algorithms efficiently capitalize on these market inefficiencies. (See also: Marijuana Short Sellers Have Lost $626M Since August: Report.)

Tilray traded near $220 in Thursday’s pre-market after closing Wednesday at $214. Since its mid-$20s IPO in July, the stock initially traded between $21.50 and $34.10. An August breakout ignited a strong upward channel, pushing the price into triple digits just last week. On Tuesday, the stock broke above this channel and surged further mid-week, with Wednesday’s low confirming new breakout support just above $150.

The stock’s price has surged nearly 100% above the upper Bollinger Band®, indicating a clear overbought condition. Historically, each time this has occurred since the IPO, the rally paused, signaling a potential short-term reversal and buying opportunity once weaker hands exit. This correction could involve another support test in the mid-$100 range. (For more details, see: Tilray Receives DEA Approval for Cannabis Imports for Medical Research.)

Cronos Group broke through strong resistance at $2.60 in November 2017, initiating a robust uptrend that peaked at $11.90 in January 2018. A pullback found solid support at $4.75 in February, with two successful retests, followed by a recovery rally reaching resistance in August. Since then, the stock has experienced volatile, two-way trading that may represent the final phase of a cup-and-handle breakout pattern.

A decisive breakout could gain momentum if the stock surpasses Wednesday’s high of $15.30, potentially fueling an uptrend targeting $19.00 initially. However, Bollinger Bands® might again act as a resistance indicator, as seen with a mid-week reversal after piercing a contracting upper band (blue arrow). This 'poke-and-reverse' pattern signals strong resistance at new highs. (See also: 5 Marijuana Stock Picks: Cowen.)

Canopy Growth hit a record low of $1.01 in 2015 before embarking on a sharp uptrend that reached new highs in October 2016. Over the past two years, the stock has delivered impressive gains, recently surpassing the January 2018 high of $35.88. Although prices have more than doubled in the last five weeks, active selling pressure suggests aggressive profit-taking.

Resistance near the mid-$50s Bollinger Band® has triggered two reversals, trapping latecomer shareholders. These investors now face a potential pullback that could test the recent low around $41. A breakdown below this level might target the August breakout gap near the mid-$20s. Conversely, if the stock rallies into the upper $50s, it could ignite another buying surge. (For further reading, see: A Marijuana ETF Just Surpassed $1B in Assets.)

The Bottom Line

Momentum-driven investors are fueling double-digit gains in low-float cannabis stocks, but expect high-volume sell-offs and sharp reversals in upcoming sessions. (For more insights, read: SEC Issues Warning About 'Hot' Marijuana Investments.)

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