Photo courtesy of Tilray. 

Canopy Growth Corporation CGC and Tilray, Inc TLRY soared 10.59% and 8.76%, respectively, on Monday. The overall sector has been all but demolished since the high times of 2018 when Canada legalized cannabis at the federal level, and the beginning of 2021, when President Joe Biden’s inauguration led many to believe federal legalization in the U.S. may be on the horizon.

Canopy Growth Corporation has plummeted 86% from its Oct. 16, 2018, all-time high of $59.25, while Tilray has plunged about 98% from its Sept. 19, 2018, all-time high of $300. Although the stocks shot up again in February 2021, with Canopy Growth reaching a high of $56.50 and Tilray soaring up to the $67 level on Feb. 10, the sector has failed to sustain any long-term bull cycle.

If neither a continued bounce nor bull cycle takes place, the stocks are beginning to show some characteristics that could make them candidates for a short squeeze.

Canopy Growth comes in as a better candidate for a squeeze, with 18.13% of its float held short compared to Tilray, which has 13.16% of its float held short.

On Friday and Monday, both Canopy Growth and Tilray formed bullish double bottom patterns on the daily chart. The pattern is often found at the bottom of a downtrend and can indicate a reversal to the upside is in the cards.

Whether the move is merely a relief bounce or a sign the sector is about to become hot again will not be known for some time, but for shorter-term traders, the potential for upside has started to look more promising.

It should be noted that events affecting the general markets, negative or positive reactions to earnings prints, and news headlines about a stock can quickly invalidate patterns and breakouts. As the saying goes, "the trend is your friend until it isn’t," and any trader in a position should have a clear stop set in place and manage their risk versus reward.

In The News: On Jan. 25, Senate Majority Leader Chuck Schumer (D-NY) held a meeting to discuss equity issues and marijuana reform with a number of advocacy groups. Schumer plans to introduce a bill, the Cannabis Administration and Opportunity Act, to bring an end to cannabis prohibition at the federal level this year.

The Canopy Growth Chart: On Monday, Canopy Growth broke up bullishly from a falling channel in which the stock had been trading since Nov. 19, 2021. The move higher was likely a reaction to the double bottom pattern Canopy Growth printed at the $6.82 level over the two trading days prior.

• Canopy Growth is now trading above the eight-day exponential moving average, but on Monday and Tuesday morning the stock was rejecting the 21-day EMA. Bullish traders will want to see Canopy Growth regain the 21-day over the coming days to have more confidence going forward.
• Although the stock has now printed a higher high above the Jan. 26 high of $7.70, the stock will need to print a higher low above the double bottom in order to confirm a trend change to the upside.
• Canopy Growth has resistance above at $9 and $11.30 and support below at $7.36 and $6.12.

(Click on image to enlarge)

The Tilray Chart: Like Canopy Growth, Tilray bounced up from a double bottom pattern at the $5.15 mark and printed a higher high above the Jan. 26 high of $5.90.

• Tilray will need to print a higher low above the double bottom level to confirm an uptrend is in the cards.
• The stock has regained support at the eight-day EMA, and on Tuesday morning Tilray was testing the level as support. If it can hold above the area, Tilray has room to move up to regain the 21-day EMA.
• Tilray has resistance above at $6.46 and $7.16 and support below at $5.90 and $5.15.

(Click on image to enlarge)