Tilray

Shares of Tilray (TLRY)  were surging on Monday, up nearly 17% to $45.27 in midday trading. It's been a long time coming for this troubled cannabis stock. 

Along with the broader market rally, Tilray's action is helping to give a lift to others in the space. Canopy Growth (CGC - Get Report) , Aurora Cannabis (ACB - Get Report) , New Age Beverages (NBEV - Get Report) , Cronos Group (CRON - Get Report) and others are all higher on the day too.

Remember, Tilray went public in July at $17 a share. Two months later it was topping out at $300 a share, wreaking havoc in the FinTwit community. Many shorts were in too early, while some bulls thought the rally could live on for months. In the end it was an epic, albeit short ride to $300. Since then, shares have been in a steady and painful downtrend. Is Monday's action enough to set Tilray free?

It might be, but this name is a volatile and tough one to trade. Let's look at the charts.

Trading Tilray Stock

Daily chart of Tilray stock.
Daily chart of Tilray stock.

Giving Tilray stock such an enormous spark on the day is simple: Supply and demand.

Just as we talked last week about Beyond Meat's (BYND) earnings-inspired move, supply and demand drives stock prices. With steady supply, the changes in demand are ultimately reflected in rising and falling stock prices. However, when supply outweighs demand, shares prices head lower.

In the case of Tilray, the company entered a non-binding letter of intent with its top shareholder Privateer Holdings. The letter of intent extends the shareholder's lock-up period for up to two years and provides for an orderly release of stock. Privateer holds 75 million shares or roughly 77% of company's outstanding shares. The flood of stock that usually hits the market can sink a stock price in a hurry. Effectively turning that flood into a trickle is exactly why we're seeing shares move higher Monday.

Tilray stock is over its 20-day moving average for the first time since the beginning of March. Now near $46, shares are technically north of downtrend resistance too. Still, this name does not deserve "benefit of the doubt" treatment. Instead, it's ten straight months of lower highs has put it firmly in the "prove-it" camp.

As TheStreet's Jim Cramer, who manages the Action Alerts PLUS member club, would say, this one is in the penalty box and it's Tilray's job to prove to investors that it's out.

Step one? It has to maintain above downtrend resistance (blue line) and the 20-day moving average. Next, Tilray stock needs to reclaim its declining 50-day moving average. If it can push above that, then it will end its series of lower highs. Above $53 gets TLRY stock north of last month's high and gives it the chance really change the narrative around its stock price.

On the flip side, keep an eye on its 20-day moving average. If Tilray stock fails to hold this mark and slips back below downtrend resistance, the breakout could fail and it's back to the same old trend.

The bottom line? Aggressive bulls may want to buy this name on the breakout, but I want to see the move confirm first. TLRY stock has a lot to prove and one day of action isn't enough to convince me just yet.

This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.