Although Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) has rebounded modestly over the past two weeks, the broad cannabis sector hasn’t gotten the memo. Most signs I’m looking at point to continuing near-term weakness ahead, with pronounced breakdown risk should Canopy succumb to the overarching trend entangling 90% of the sector. We take a closer look into some of the contentious signs below.

Beginning with the positive, sector heavyweight Canopy Growth has broken away from the broad bear market spell to post solid recent gains. WEED has advanced ↑12.77% since the July 26 close, bucking a minor sector decline (↓0.69% – Horizons Marijuana Life Sciences Index ETF [HMMJ]) during that time. The dichotomy follows a similar dynamic seen in early spring—most notably between March 20-April 2. Back then, Canopy Growth remained remarkably resilient in the face of intense sector pressure swallowing everything in its path. Below is how Canopy Growth performed vis-à-vis the benchmark HMMJ ETF during that window of time.

Today, the situation is identical although inverted: Canopy Growth is the one enjoying stellar gains while HMMJ treads water. While the situation may yet resolve itself with the sector playing catch-up, the price action is indicating otherwise.

For starters, the current pop in Canopy Growth is quite unremarkable. After falling by a third over a 4-week span beginning June 22nd, Canopy stabilized and has recovered about 30-percent of those losses during the current upswing. But where is the volume? Every positive session has seen volume print well shy of its 50-day moving average. Deep summer doldrums or not, the present rally has a decidedly “exhaustion bounce” feel to it, rather than determined stampede buying.

With Canopy Growth up against the 50-Day SMA and multiple levels of upside resistance between $37.50-40.00/share, further upside extension will be difficult if volume doesn’t jump in a purposeful way—and soon.

But where will that buying catalyst come from? With the legalized rec market arriving soon, it’s a fair bet that established LPs will shift focus inward and channel increased attention on executing operating strategies. If so, the dearth of material news flow in Big Cannabis may continue for awhile longer. Outside of the August 1st HEXO-Molson Coors deal, there’s been little significant market moving news this month. And we’re still several weeks away before the pre-legalization hype machine starts building.

As we’ve seen sporadically throughout 2018, when the news flow dries up, the market tends to grind lower. At it’s core, the cannabis sector is still largely news/catalyst driven. This will eventually change when steady revenues/earnings permeate the sector, but we’re not there yet.

Relative Out-Performers Begin Breaking Down

Other indications portending clear market weakness reside in the mid-majors. Both Hydropothecary Corp. and OrganiGram Holdings Inc.—among the strongest non-Canopy Canadian LPs on the exchanges—have both seen deeply material events retrace almost completely.

In the case of OrganiGram, shares finished below the July 30th close—the day they announced fantastic net income and production cost numbers. Not only was the stock down ↓7.14% out of thin air, volume rose to significant thresholds for a sleepy Friday afternoon on Bay St. It would appear institutional spec traders aren’t too confident about the underlying strength of the market, and liquidated positions heading into the weekend.

Hydropothecary Corp. saw the exact same dynamic on Friday. After testing the underside of the recent channel range in the AM, selling accelerated into the afternoon and turned into a torrent on-close. The last half hour saw the biggest downside closing volume since—you guessed it—the day the HEXO-Molson deal was announced. This fact is not insignificant, and demonstrates, in my view, that program and spec selling are exiting the market in droves rather than entering it.

Both charts taken together are quite bearish in context. If stellar news is being sold into and disregarded, what does that say about underlying market vitality? It’s akin to your iPad losing charge after an hour and characterizing the battery as “strong”. If the relative out-performers can’t stand tall, the market is—by its very definition—weak.

With the supporting pillars of mid-major support falling by the wayside, it appears Canopy Growth remains an isle of its own. But for how long?

Final Thoughts

If we combine the fact that Aurora Cannabis Inc. and Aphria Inc. remain weak, it’s hard to envision Canopy Growth winning out against the broad market. In the case of Aurora—which has the second largest market cap in the sector—prices haven’t been this low since last November.

At some point soon, the sector leader (Canopy Growth) and sector index (HMMJ) will reconcile diverging performance with one catching up with the other. Right now, as in late March, the odds favor lower downside extension. There’s simply too many sector components showing little buying impetus at present. As such, I expect continuing sector erosion heading into next week.

Key near-term market levels (HMMJ) on the hourly chart include ↓$15.65/share, with ↑$16.40/share invalidating the broad market bearish impulse. A closing low ↓15.30/share is a place long-based cannabis investors don’t want to be.