Shopify Inc. (SHOP) stock fell more than 5% on Wednesday toward key support levels at the bottom of its price channel. With tech stocks under pressure, the move wasn't driven by any particular fundamental developments, but rather the move by traders to reduce positions in potentially overvalued or overextended stocks in lofty sectors.
KeyBanc sees a buying opportunity following the pullback. The analyst notes that the 55 largest software-as-a-service (SaaS) stocks had experienced an incredible run through the end of the third quarter, but the group is down 11% this month and 21% from its highs on average. Some of these companies remain fundamentally sound with strong growth rates projected through 2020. Shopify made the analyst's list of eight high-quality SaaS apps that investors should consider, alongside Salesforce.com, Inc. (CRM), Twilio Inc. (TWLO), Wix.com Ltd. (WIX), Zendesk, Inc. (ZEN), BlackLine, Inc. (BL), Avalara, Inc. (AVLR) and MindBody, Inc. (MB). (See also: Top 10 Hidden Factors Affecting Software Stocks.)
From a technical standpoint, Shopify stock broke down from S1 support and the 200-day moving average at around $140.75 and briefly touched the lower end of its price channel at around $127.00. The relative strength index (RSI) reached oversold levels of 30.24, but the moving average convergence divergence (MACD) remains in a strong bearish downtrend. These indicators suggest that the stock could see some near-term consolidation above the trendline support levels.
Traders should watch for a rebound from trendline support to retest S1 support and the 200-day moving average if the market shows signs of recovery. If the market continues to move lower, traders should watch for a breakdown from trendline support to S2 support at around $116.32 on the downside. Near-term consolidation seems to be the most likely scenario given the oversold nature of the stock on a technical level. (For more, see: 10 Stocks That Will Thrive as Consumer Spending Surges.)
Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.