Alter View dentro do procedimento armazenado

Você não poderá executar o ALTER VIEW instrução como essa em seu procedimento armazenado. Então para resolver seu problema você deve tomar 2 ações:

1) Para corrigir o erro que aparece atualmente, você deve iniciar o CTE com um ponto e vírgula assim:

WITH cte as (
    SELECT *, 
       LAG([pointsRewarded], 1) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev1_points,
       LAG([pointsRewarded], 2) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev2_points,
       LAG([pointsRewarded], 3) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev3_points
FROM week1)
SELECT *,
   CASE WHEN [pointsRewarded] = -10 AND prev1_points = -10  AND prev2_points = -10  AND prev3_points = -10 
        THEN -200
        WHEN [pointsRewarded] = -10 AND prev1_points = -10  AND prev2_points = -10 
        THEN -100
        WHEN [pointsRewarded] = -10 AND prev1_points = -10
        THEN -50
        ELSE 0
   END penalty       
FROM cte

(Ou melhor ainda, comece a encerrar todas as suas instruções SQL com ponto e vírgula, pois a alternativa está obsoleta).

2) Converta sua instrução alter view em uma string SQL dinâmica e execute-a usando sp_executesql como ALTER VIEW declaração deve ser a primeira no lote:

CREATE PROCEDURE createviewupdatepenaltypointsconsecutive
AS
BEGIN
   DECLARE @STMT AS NVARCHAR(MAX) =
   '
  ALTER VIEW consecutive
  AS


  WITH cte as (
      SELECT *, 
             LAG([pointsRewarded], 1) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev1_points,
             LAG([pointsRewarded], 2) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev2_points,
             LAG([pointsRewarded], 3) OVER (PARTITION BY [EmployeeID] ORDER BY [WeekNumber]) as prev3_points
      FROM week1
  )
  SELECT *,
         CASE WHEN [pointsRewarded] = -10 AND prev1_points = -10  AND prev2_points = -10  AND prev3_points = -10 
              THEN -200
              WHEN [pointsRewarded] = -10 AND prev1_points = -10  AND prev2_points = -10 
              THEN -100
              WHEN [pointsRewarded] = -10 AND prev1_points = -10
              THEN -50
              ELSE 0
         END penalty       
  FROM cte
   '
   EXEC sp_executesql @STMT;
END