Momentum favorite and multi-channel commerce platform Shopify, Inc. (SHOP) fell more than 8% in the opening minutes of Thursday's U.S. session, adding to Wednesday's double-digit percentage losses triggered after a well-known short seller issued a bearish report that called for a Federal Trade Commission (FTC) investigation. The news sent predatory algorithms into a selling frenzy, generating a one-sided tape that has now dumped the stock more than 20 points.
Andrew Left's Citron Research has triggered similar declines in other hot issues in recent years, bolstered by the fund manager's frequent media appearances. He is best known for aggressive bets against Valeant Pharmaceuticals International, Inc. (VRX), which fell more than 250 points in reaction to a distribution and overcharging scandal. The short-selling community hopes that lightening will strike once again, with Shopify having more than tripled in price since November 2016. (See also: Shopify Crushes Earnings – Is the Stock a Buy?)
SHOP Weekly Chart (2015 – 2017)
The Canadian software provider came public on the U.S. exchanges at $28 in May 2015, entering an immediate uptrend that topped out at $42.13 just one month later. It turned lower into the summer months, bouncing at $22.70 and testing the rally high in October. A failure at that level carved the final leg of a triple top pattern ahead of a downtrend that reached an all-time low at $18.48 in February 2016.
Shopify stock completed a double bottom reversal in March and entered an uptrend that stalled well short of the 2015 high in May, ahead of mixed action and an August breakout that reached the mid-$40s in the fourth quarter. The stock spent four months grinding sideways at that level and broke out again in December, entering a vertical trajectory that reflected intense momentum buying interest. (For more, see: Shopify Q2 Loss Narrower than Expected, Revenues Beat.)
It doubled in price in less than four months and kept on going, topping out near the triple digits in June 2017. A bullish consolidation at that level attracted fresh buying interest, triggering an August breakout that posted an all-time high at $123.94 on Sept. 18, while this week's decline into the double digits has penetrated the top of the trading range from May into August of between $81 and $105.
The weekly stochastics oscillator rolled into a sell cycle at the end of September, foretelling this week's reversal and decline while predicting another five to ten weeks of relative weakness. This bearish signal could play out through price, time or both technical elements, favoring a consolidation at lower levels while shell-shocked shareholders lick their wounds and catch their collective breath. (To learn more, check out: Stochastics: An Accurate Buy and Sell Indicator.)
SHOP Daily Chart (2016 – 2017)
A Fibonacci grid stretched across the rally waves that started in November 2016 places the bottom of the third quarter trading range at the .50 retracement in the lower $80s. A decline into that price zone will also complete a 100% retracement of the May into September rally wave, setting off a bearish first failure and marking an early warning signal for a top or trend reversal. In addition, that decline would also mark a failed fifth wave of an Elliott five-wave rally pattern that also ends the uptrend.
The sell-off is now testing support at the third quarter trading range. That pattern carved five highs between $96 and $105, while the stock has dropped to $95 as of Thursday morning. This undercut could signal a washout ahead of an oversold bounce back to $100, with consolidation around that magnetic level setting the stage for a stronger recovery wave or range breakdown that sets off longer-term sell signals. (See also: Shopify Stock Falls to Critical Support Level.)
The Bottom Line
Shopify has dropped more than 20 points on heavy volume since Wednesday's opening bell, signaling a long-term reversal that could end the powerful 20-month uptrend. At a minimum, it will take months of consolidation and base building before committed bulls re-establish the upward trajectory and post new highs. (For additional reading, check out: Shopify Launches E-Commerce Channel for Gaming Companies, Integrates With Apple.)
<Disclosure: The author held no positions in the aforementioned securities at that time of publication.>