Canadian e-commerce platform provider Shopify Inc. (SHOP) thrilled shareholders with a breakout to a two-month high on Monday in reaction to strong Black Friday and Cyber Monday merchandise sales. However, the rally reversed right at hidden resistance, posting a shooting star candle while setting off preliminary sell signals that could eventually reward aggressive short sale positions.

The reversal unfolded at the .786 Fibonacci retracement of the steep decline into mid-October, triggered by Citron Research's bearish call. Managing editor and noted short seller Andrew Left called Shopify's cloud-based e-commerce solution for small and medium-sized business "a completely illegal get-rich scheme," setting off waves of selling pressure intensified by predatory algorithms.

Again, this is a preliminary call requiring a series of technical dominoes to fall to signal a major decline that drops this momentum favorite back into the double digits. In addition, Left's involvement practically ensures excessive high short interest levels, raising the odds for periodic squeezes to shake out weak hands. As a result, well-honed risk management skills may be needed to profit from bearish positioning. (See also: Shopify Uptrend at Risk After Latest Bear Raid.)

SHOP Daily Chart (2015 – 2017)

The company entered the U.S. exchanges at $28 in May 2015 and rallied to $42.13 less than one month later. The subsequent decline cut through the IPO opening print in January 2016 before bottoming at an all-time low in the upper teens. The ensuing uptick stalled just above the 2015 high in August, easing into a narrow trading range ahead of a January 2017 breakout that attracted intense buying interest.

The multi-wave uptrend continued into June, lifting the stock into round number resistance at $100. It spent three months consolidating at that level and took off in a climactic rally wave that added 36 points in less than six weeks before topping at $123.94 on Sept. 18. A weak bounce following a pullback to $112 posted a lower high on Oct. 3, followed by a brutal decline that found support at the bottom of the mid-summer trading range.

On-balance volume (OBV) highlights intense technical damage incurred during the October rout, dropping to levels posted in the first half of 2016, when the stock was trading 70 points lower. More importantly, the 26-point bounce since the Oct. 10 low at $89.35 has failed to generate substantial buying interest, keeping the indicator below the Oct. 27 swing high. Taken together, the stock could now reverse and head into a steep decline that tests fourth quarter lows. (To learn more, check out: Uncover Market Sentiment With On-Balance Volume.)

SHOP 60-Minute Chart (2017)

Fibonacci grids stretched across 60-minute bars since June organize seemingly chaotic price action. The October decline found support at the .786 Fibonacci retracement level of the last rally wave between $81 and $124 (black lines). The stock bounced into the 50% sell-off retracement (red lines) in late October, pulled back to post a higher low and rallied into the .786 sell-off retracement in Monday's session. This level marks the inception point of the Citron-driven decline and a high-odds price zone for a lower high and a steep reversal.

A decline through the .618 sell-off retracement level at $110 is now needed to confirm a downturn that sets off aggressive short sale signals. Traders and market timers also may wish to wait for a penetration of the 60-minute 50-bar exponential moving average (EMA), currently rising through $109, before taking exposure, because that would also signal a breakdown through the late October high. Traders should expect bulls to make a final stand until daily support at $104 breaks, which will then favor a rapid decline toward $95. (For more, see: High-Flying Shopify Stock Nosedives After Short Call.)

The Bottom Line

Shopify reversed at the .786 Fibonacci sell-off retracement level on Monday, while OBV continues to struggle near 2017 lows. This potently bearish combination could generate a major decline in the coming weeks, dropping the stock back toward fourth quarter lows near $90. (For additional reading, check out: Shopify Cuts a Deal With UPS for Its Clients.)

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