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Shopify Doubles This Month, Is it Time to Take Profits?

Shopify has rallied 99% from its April lows to the April highs. Traders should consider booking profit in the stock and waiting for a pullback.

Shopify  (SHOP)  has rallied 99% from its April low to its high on Tuesday. However, the stock is putting in a nasty reversal on the daily chart as the broader markets move lower.

That’s not the action investors want to see in Shopify, particularly if they are still bullish. For me, this type of move would signal that it’s time to take profit - or at the very least begin trimming a considerable chunk of the position.

For some nimble traders, they may even consider it a shorting opportunity, even though the stock is already lower by 9.5% on the day. Keep in mind that at one point this stock was up more than 5.5% on Tuesday despite the downbeat backdrop of the declining Nasdaq and S&P 500.

The stock has been surging along with other e-commerce plays like eBay  (EBAY)  and  (AMZN) . It helps that management recently touted the company’s strong traffic flow. Let's look at the charts. 

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Trading Shopify Stock

Daily chart of Shopify stock.

Daily chart of Shopify stock.

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Shopify stock really took a beating in March, dumping from almost $600 per share in February to almost $300 at its March low. After a quick rebound - where the stock was rejected from the 50-day moving average - Shopify promptly broke below $400.

The move came after the company updated its guidance. Importantly though, Shopify stock didn’t retest the March lows on that move. Instead, it found its footing between $335 and $350, before rebounding higher and eventually catching fire.

Currently, the stock is putting in what’s known as a bearish engulfing candle on Wednesday. It doesn’t take much analysis to understand that that’s a bearish technical development and suggests the stock may continue lower in the coming days and possibly weeks.

If that’s the case, we need to know where potential support is. It's a good sign if Shopify can hold the former high at $593.89. If it can't, the next area to watch is $550. This level was post-earnings resistance in February, a level the stock easily rallied through last week.

If that doesn’t hold, sellers will have a firmer grip on the action than anticipated. It will put $500 on the table, followed by the 50-day moving average currently near $453. It’s worth pointing out that $500 is also the 50% retracement of the April range.

After such a violent move higher, Shopify stock is clearly displaying plenty of relative strength. It’s a name we want to be long, but after such a strong rally followed by the current reversal, the current risk/reward favors a pullback first. Let’s see what kind of action we get over the next few days and weeks.