PreMarket Prep Stock Of The Day: Canopy Growth

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

The financial markets always speculate on which stocks or sectors will benefit from the outcome of a presidential election or ballot issue.

With the legalization of marijuana — both for recreational and medical purposes — on several state ballots, some investors aggressively purchased shares of Canopy Growth CGC on Monday in anticipation of the ballot questions being approved.

While the legalization of marijuana has passed in all states, Canopy Growth is in the red and is the PreMarket Prep Stock of the Day.

Canopy's Downtrend Since September 2018: There is no doubt that Canopy Crowth had a spectacular run off its August 2015 low of $1.01. The rally did not end until it peaked in October 2018 at $59.25 and posted its all-time closing high on Oct. 15, 2018 at $56.89, but then collapsed to end the year at $26.87.

It made a run at those elevated levels in the first few months of 2019, reaching $52.74 in April before plummeting to end the year at $21.09.

Investors had the opportunity to buy the issue in single digits in March, when it bottomed at $9. 

Buyers At The $14 Area: While novice investors may pile into an issue a day or two before an expected catalyst, savvy investors take a longer-term approach and take days or weeks to build a large position.

After some zig-zag price action off the March low, racing to $18.39 in May, Canopy was back to the $14 area in late September and early October. That's when the big buyers started to accumulate shares.

In nine consecutive sessions from Sept. 23 through Oct. 6, it made all its daily lows from $13.88 to $14.26, ending the last session of this period of $14.32.

Election Buzz: On no news, the issue climbed from $14.32 to $15.53 Oct. 7.

That night, Democratic vice presidential candidate Kamala Harris pledged during a debate to decriminalize marijuana and expunge the records of those convicted of marijuana possession.

The following day, Canopy exploded from its previous day's close ($15.53) to $17.63 on nearly three times its average trading volume, and the trade become more widespread.

It meandered at the area until another round of buyers came in on Monday, Nov. 2, taking the issue as high as $21.67 before retreating to end the day at $20.93, once again on much higher-than-average volume.

Crowded Canopy Trade: While the buyers were coming in on Monday, it is likely that the buyers in the $14 area were selling their shares to them to take profits for a few reasons.

First of all, there was no guarantee how the cannabis votes would turn out. Also, after a 57% rally in a little over a month, how much of the good news was already priced into the issue?

"Crowded traded 101: you have to be careful on your exits on these type of trades," PreMarket Prep co-host Dennis Dick said on Wednesday's show.

Canopy Price Action: After a lower open Wednesday, Canopy breached Monday’s low ($19) and found support just ahead of a trio of lows from last week at the $18.15 area and reversed course.

The stock was down 7.62% at $18.90 at the time of publication. 

Courtesy photo.