Weed Stock Buy Signal Flashes Again

The oversold stock's pullback could be an opportunity for bulls

Clearly, the legalization of marijuana in Canada on Oct. 17 was a "sell the news" event, one that pressured Canopy Growth Corp (NYSE:CGC) and its weed-growing peers lower from record highs. However, as Canaccord Genuity analysts noted yesterday, "cannabis stocks are seeing selling volume decrease as they approach important support levels, [which] supports a near-term counter-trend bounce." What's more, CGC stock recently pulled back to a pair of key moving averages, which could make for an appealing buy signal, if recent history is any indicator.

Canopy Growth stock -- last seen up 2.7% at $33.95 -- is within one standard deviation of both its 160-day and 200-day moving averages, after a lengthy stretch above these trendlines. The last and only other time the 160-day signal flashed, it preceded a whopping 90.69% rally for CGC shares over the next month, per data from Schaeffer's Senior Quantitative Analyst Rocky White. After the 200-day signal, CGC was up 56.77% one week later, and 79.16% one month out.

What's more, CGC came into today with a 14-day Relative Strength Index (RSI) of 31 -- on the cusp of oversold territory, suggesting a short-term bounce could be in the cards. And an exodus of newfound short sellers wouldn't hurt, either. During the most recent reporting period, Canopy Growth short interest surged 16.1%, and now accounts for over 16 million shares.

In the same skeptical vein, CGC option bears are active today -- a reversal of the call-buying trend we saw before Canada legalized weed. The security has already seen about 11,000 puts cross the tape -- 1.2 times the average intraday pace. Most active is the weekly 11/2 30-strike put, which appears to be seeing some buy-to-open activity, as speculators bet on a breach of $30 by Friday's close. Slightly longer-term bears are scooping up the November 35 put.

Should Canopy Growth stock once again bounce from the aforementioned moving averages, a short squeeze or a rush to exits by option bears could add fuel to the pot stock's fire. Against this backdrop, it could be time to scoop up CGC on sale.