In order to understand gaps you need to understand how support levels form. Suppose a stock is trading at $20. For each trade, there is a buyer and a seller.
Now suppose the stock price falls to $15. The sellers believe that selling was the correct decision, and the short-sellers are happy because they have a profit.
Now suppose the stock rallies to $25. The sellers now believe that they have made a mistake. They tell themselves that if the stock comes back to the $20 level they will buy it back.
The short-sellers are now losing money and they tell themselves that if they can, they will cover theirs shorts at $20 and break even. Buyers wish they bought more and tell themselves that if the stock drops back to $20 they will add to their positions.
Added to this are the professional traders who want to profit off of a clearly defined level and you can see that there are four different groups of buyers who are interested in buying the stock at $20. This demand for the stock will appear as a support level on a chart.
The longer the period of time that a stock trades at a certain price, the greater the amount of support and resistance that will form at that prices. This is because more participants enter the market as time passes so there will be an increasing amount of vested interest. When a stock doesn’t much time at a level these higher amount of support and demand don’t have time to form.
This is the case here. In January Canopy Growth’s stock gapped up from $30 to $40 in just a few days. Because of this there wasn’t time for meaningful buy interest to form. That is why the stock price has dropped so rapidly. Gaps tend to refill and that is what we are seeing here. The rest of the gap may refill and that would bring the price down to around $30.
People who don’t practice technical analysis may think the stock price fell because of the CEO getting fired. I would like them to understand that I first spoke about this gap refilling before the news about Mr. Linton was made public. Let me assure you that I am not a psychic and had no knowledge of this news beforehand. I just have a lot of experience and I understand how supply and demand dynamics drive markets.
As for Mr. Linton, do I think he should have been fired? Yes. This company is losing hundreds of millions of dollars. Mr. Linton seemed to run CGC as an idealistic social experiment rather than as a company that makes money for its shareholders.
His utopian ideas — such as giving so much stock the to company’s employees — may sound great in theory, but seldom work in reality. After all, if you give away too many shares it will bankrupt the company. What social benefit comes from giving stock that will eventually be worthless to your employees?
All that being said, do I think different leadership will turn the company around? Maybe, but whoever this person is will have a very difficult if not impossible job to do.
This is because there will be a reckoning happening in the cannabis industry soon. As far as I can tell most of these big cannabis companies like Canopy, including Tilray (NASDAQ:TLRY), Aphria (NYSE:APHA) and Cronos (NASDAQ:CRON), mostly grow either inside or in greenhouses.
However, growing cannabis outside is significantly cheaper. Indoor or greenhouse growing may have some advantages, such as greater security and better quality, but investors are starting to come to the realization that the cheaper costs of outdoor growing far outweigh them. Significant price wars are going to occur and these big growers will all suffer.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.
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