E-commerce platform provider Shopify Inc. (SHOP) hit an intraday market cap of nearly $14 billion ahead of Thursday's pre-market earnings, with the stock lifting to an all-time high in the upper $130s. Good vibes persisted into the report, reaching $145 after the company beat EPS estimates by 10 cents while setting first quarter and fiscal year 2018 guidance modestly above consensus. Sellers then took control in a 13-point slide that bounced at new support.
The stock topped out in October 2017 when noted short seller Andrew Left made the rounds in the financial media, advocating his new position. The jawboning generated a 25% decline, but the stock eventually recovered, heading back to the rally high and breaking out ahead of this week's report. However, the sell-off generated significant technical damage that may limit or reverse gains in the coming weeks.
SHOP Long-Term Chart (2015 – 2018)
The Ottawa-based company came public on the U.S. exchanges on May 21, 2015, opening at $28 and selling off to $24.11. It bounced along that price level for a few weeks and took off in a vertical buying impulse that stalled in the low $40s in late June. Price action then settled into a trading range between those extremes, with a single violation failing to generate a sustainable trend into a January 2016 breakdown that posted an all-time low at $18.48.
A February double bottom reversal at that level yielded a strong bounce that remounted the broken range in March. Hopeful buyers took firm control into the summer months, lifting the price back to range resistance, but that level continued to mark resistance until a January 2017 breakout. Momentum players then stepped in, generating intense buying pressure that more than tripled the stock's price into June, when it topped out at $100.80.
Shopify shares built a narrow base across that psychological level into August and broke out once again, lifting into the $120s, where aggressive sellers triggered a major reversal after Left's bearish commentary. The decline found support in the upper $80s in October, yielding a weak bounce, followed by a December test that generated another double bottom pattern. The subsequent advance reached the prior high in January 2018, ahead of this week's breakout, which cleared the old high by more than 10 points.
SHOP Short-Term Chart (2017 – 2018)
The stock carved a cup with high handle pattern between September 2017 and January 2018, setting the stage for this week's breakout. The deep cup establishes a measured move target near $160, which roughly aligns with the rising highs trendline in place since May 2017. Straight up price action between $114 and $145 in the past week looks unsustainable, raising the odds for testing at new support that could easily undercut the $130 level.
On-balance volume (OBV) entering an accumulation phase in early 2016, accelerating at the start of 2017 when the stock broke out above range resistance in the upper $40s. It rolled into a distribution phase in June and tested the high in September, just ahead of a high-volume decline that dumped the indicator to the lowest low in more than a year. Buying pressure since that time has failed to penetrate the midpoint of the downswing, generating a bearish divergence that could presage a failed breakout, trapping new shareholders. (For more, see: Shopify Stock Retests All-Time Highs Ahead of Earnings.)
The Bottom Line
Shopify has turned lower in reaction to fourth quarter earnings after a strong breakout lifted the stock into the mid-$140s. This decline needs to hold support in the $126 to $130 price zone to avoid a failed breakout that sets off even stronger sell signals. Bearish OBV readings give bears an edge in this conflict, favoring eventual downside toward $116. (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.>