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) - Get Report and Amazon.com (AMZN) - Get Report. It helps that management recently touted the company’s strong traffic flow. Let's look at the charts.
Trading Shopify Stock
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.