Shares of internet retailer Wayfair Inc. (W) fell to a five-year low in March and bounced strongly into the second quarter, lifting to an all-time high in a 175-point assault before reversing gears last week in a long overdue pullback. This looks like a perfect time and place for shareholders to take profits and head back to the sidelines because the current downturn could last for weeks and relinquish a big chunk of upside posted in the past two months.

The reversal has dropped the stock back under the 2019 high at $173, denying breakout buyers while reinforcing range resistance that could remain in force well into the third quarter. The rally also printed three large gaps – at $30, $55, and $140 – that are likely to act as magnetic targets on the downside. That's a big deal when two of the holes are located 100 points or more under the currently traded price.

Healthy uptrends tend to evolve through higher highs and higher lows, but Wayfair stock failed to carve a single higher low during the vertical advance. Even a 30% to 40% correction off the peak would be painful, booking another 40 to 60 points of downside for those left holding the bag. Intense buying interest during the uptick should ease selling pressure, but it may not be enough to find a trading floor within striking distance of the breakout level.

W Long-Term Chart (2014 – 2020)

Long-term chart showing the share price performance of Wayfair Inc. (W)
TradingView.com

The company came public at $36.00 in October 2014 and fell to an all-time low at $16.74 just two months later. The subsequent uptick completed a round trip into the IPO opening print in June 2015, generating an immediate breakout that stalled quickly in the mid-$50s. Range-bound action took control into 2017 when a May breakout signaled the return of momentum buying interest and aggressive short sellers.

The stock posted four new highs into the first quarter of 2019, when it topped out at $173.72, ahead of a steady downtick that settled near $80 in November. A bounce into January carved a lower high at $112, giving way to a test of range support, followed by a high-volume breakdown during the pandemic panic. The sell-off relinquished more than 90 points into the March low at $21.70, which marked the lowest low since February 2015.

The bounce into April accelerated after the company said that it would meet or exceed first quarter guidance due to a stay-at-home revenue surge. March growth more than doubled compared to January and February, setting off a buying frenzy that reached an all-time high on May 6. However, Wall Street analysts have now raised doubts about the torrid growth pace, with most Americans finally emerging from hibernation. 

The weekly stochastic oscillator has just crossed into a sell cycle that predicts six to ten weeks of relative weakness. That's not a big deal for most strong stocks, but Wayfair is working off overbought readings after a rally of 170-plus points, raising the potential for a steep retracement that tests new support at the 50-week exponential moving average (EMA) above $100, more than 50 points below this morning's opening print.

W Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Wayfair Inc. (W)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator reached 2019 resistance during the rally and broke out before reversing with price last week. Watch the prior high (black line) closely in coming sessions because selling pressure that carries through new support will confirm that range resistance is back in control of the ticker tape. Given the current price structure, that event is likely to coincide with the filling of the May 5 gap between $134 and $160.

The gap fill level has narrowly aligned with the .382 Fibonacci rally retracement level at $129, making it a natural first target on the downside. It's also an obvious support level, so bulls may have an opportunity to build a higher low around that price zone. Look out below if the effort fails because the stock could drop quickly into the 200-day EMA at $100 and flirt with a trip back into the double digits.

The Bottom Line

The Wayfair rally may have ended, signaling a good time for most shareholders to take profits and walk away.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.