Is PYX Stock Destined to Correct or Break Out Toward Higher Prices?

PYX Stock: $52.43 Is Not Some Arbitrary Price Point

In the late stages of a bull market, the price action has a tendency to get a bit frothy. This frothy price action, which is driven by emotions such as greed and the fear of missing out, is why stocks can experience wild moves, sometimes even doubling in a single day.

A great example of frothy price action is what is currently taking place in the marijuana stock sector. The sheer mention of anything marijuana- or cannabis-related in a news release causes a company’s stock price to surge as a result. We saw similar price action in cryptocurrencies and blockchain stocks late last year, and when cooler heads finally prevailed, a painful correction followed.

I believe a stock currently experiencing frothy price action is Pyxus International Inc (NYSE:PYX). This company’s core business is to supply tobacco to cigarette companies.

The factor that has attracted investors to Pyxus stock is that the company has ventured into the marijuana industry through its Canadian subsidiary, which has just received its license to grow and cultivate marijuana. The venture into this lucrative space and license to grow were responsible for the incredible move that gripped this stock in recent weeks.

Since July 30, PYX stock is up 195%, which does not account for the high of $52.43 that was attained on October 9, 2018.

There are now some signs suggesting that not only has this move become frothy, but that it has become overheated, suggesting that a correction is very likely.

The first set of signals suggesting that PYX stock is now likely to correct were generated on October 9, 2018. These signals are captured on the following Pyxus stock chart.

Chart courtesy of StockCharts.com

On October 9, 2018, PYX stock experienced a wild trading day. The stock opened at $48.89 and climbed as high as $52.43 before selling pressure overwhelmed the stock for the remainder of the day.

Pyxus stock did manage to close higher by 4.15% on the day, but because it closed lower than it had opened, the candlestick on the stock chart is black instead of white.

A black candlestick, such as this one, that occurs after a stock has made a significant run is called a black cloud. Black clouds only occur when selling pressure overwhelms the price action, as savvy investors head for the exits. Black clouds are effective at indicating that a trend has reversed, especially when this candlestick is accompanied by a surge in volume.

On October 9, when the black candle was printed, there were 22.9 million shares that traded hands. To put things in perspective, the average traded volume over the last 65 days was one million shares per day. 10x the average volume is considered significant; 22x the average volume is extreme.

The black cloud and the surge in volume are indications strongly suggesting that a correction is likely to follow.

These indications are not alone. The high of $52.43 that was registered on October 9 was not some arbitrary number that investors just randomly picked. This price point is very significant, and the following Pyxus stock chart illustrates why.

Chart courtesy of StockCharts.com

This PYX stock chart illustrates that $52.43 is a significant level of price resistance outlined by a downtrend line.

A downtrend line is a simple metric that captures and defines a bearish trend. This downtrend line was produced by simply connecting the peaks that have been created on the Pyxus stock chart.

This downtrend line is acting as a dividing line. As long as PYX stock is trading below it, I can only assume that the bearish trend that began in 1997 is still in development. Therefore, lower prices should prevail over time.

It is not a mere coincidence that Pyxus stock met resistance at the downtrend line. The bearish trend captured by the downtrend line has been in development for 21 years; breaking above it would have been a very significant event. It would have suggested that the bearish trend had finally run its course, opening the door for a potential bullish trend to follow.

Perhaps such an outcome is on the horizon. But at the moment, the indications I have outlined suggest that a correction is likely and that the predominant trend remains bearish.

Analyst Take

A number of technical indications are currently suggesting that the incredible move toward higher Pyxus stock prices has run its course and, therefore, the stock price is likely to correct.

Going forward, I will be watching price resistance that currently resides at $52.43. A break above this price point would be a significant event suggesting that much higher PYX stock prices are likely to follow.