Chart of the week: A stock with 20% upside potential

by John Burford from interactive investor |

This set-up is a chartist's dream, and the odds are stacked heavily in favour of a significant rally. 

Canopy Growth keeps growing like a weed!

This is one of the members of the hot "pot stocks" in Canada and the US that draws headlines as pot comes in from the cold.  The health benefits of cannabis have been known for generations, yet many still cling to the idea that it is a harmful drug and should be banned.  Political pressure has kept cannabis in the weeds, as it were.  But things are changing as more countries legalise.

I well recall seeing the unintentionally hilarious and clumsy 1936 propaganda film Reefer Madness in the 1970s that melodramatically pictured teenagers being lured by pushers into an over-the-top drug habit.   But that was aimed at the recreational use, not the more investor-friendly pharma aspect, which has suddenly arrived on the scene.

Today, the medical benefits of cannabis are increasingly being accepted, but it is no easy matter growing suitable pharma products.  In fact, Canopy Growth (TSE:WEED) along with others are still perfecting the cultivation techniques in the face of supply worries.  But the potential market is huge.

With the list of cannabis investment products growing (there is even a tradeable Cannabis Index), interest in this sector can only grow – and Canopy Growth is one of the leaders.  Here is the all-important chart:

Source: interactive investor  Past performance is not a guide to future performance

In fact, this chart is an Elliottician's dream!  It shows very clearly a series of five waves up and then three waves down – the very definition in Elliott terms of an impulsive move – in this case, up.

Note the large momentum divergence at the Christmas low at $25 which, importantly, did not break below the former low.  At Christmas, markets were falling heavily and production worries for Canopy Growth - along with the other cannabis producers – were intense.

But using the old Buffett maxim: Buy when the others are panic selling, that was a terrific opportunity to get in at a low price.

Since then, the shares have climbed (in another 'five up') and then corrected in a three, and then swiftly reversed to break my blue trendline in late April to confirm the uptrend.

And now the shares are pulling back to attempt a “kiss” on that trendline (currently at around $43) where I expect a renewed push up towards the old high at $52 at least.

But if it declines to the pink warning level at around the $40 area, I would likely amend my stance, but odds definitely favour a continued bull run.

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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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