Did you hear the big news?!! Recreational cannabis is now legal throughout all of Canada!! Aren't you excited? It's probably a great time to buy some cannabis stocks right?
Considering that this Canadian legalization has been known about for months it's far from a surprise to anyone. In fact, cannabis stocks have been experiencing a rip-roaring rally for the last couple of months with many of the most well known multi-billion dollar market cap stocks like Aurora Cannabis and Canopy Growth more than doubling since August.
Needless to say, expectations are high (no pun intended) and there are a lot of cannabis investors who have been waiting for October 17th to roll around for a long time. So what will happen tomorrow?
If today is any indication cannabis investors could be in for a big disappointment on Canadian legalization day. Here's why...
ACB.TO (Daily)
Shares of Aurora Cannabis (~C$13.5 billion market cap) suffered what is called a "failed breakout" on Tuesday as an opening gap higher gave way to selling throughout much of the rest of the trading session. ACB also printed a bearish engulfing candlestick which means that today's open was above yesterday's high and price closed below yesterday's low, forming a large full bodied red candlestick in the process. From a technical chart standpoint it doesn't get much more bearish than a bearish engulfing candlestick forming with heavy volume amid a failed breakout at all-time highs.
The largest publicly traded cannabis stock, Canopy Growth (TSX:WEED, NYSE:CGC), also experienced a similar failed breakout during Tuesday's trading session:
CGC (Daily)
Failed breakouts at all-time highs are significant because they can indicate that the tide has finally turned and bulls are taking advantage of the high prices to exit. Bearish reversals across the cannabis sector laid against the backdrop of extreme bullish sentiment and a "liquidity event" (Canadian legalization and all the news coverage it will bring) might be the perfect formula for a significant correction in the cannabis space. A correction back to their respective 50-day moving averages would equate to a ~15% drop for CGC, and a ~30% decline in ACB from today's closing prices.
I have made some bearish speculative short term bets using put options and short stock positions in both ACB and CGC.
As always do your own due diligence, it's your money and your responsibility. Shorting stocks and trading options are for more advanced traders and not for everyone.
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