Shopify Inc. (SHOP) stock is under pressure once again after surviving a five-day, 26-point bear raid in early October, which was triggered in reaction to a sharply negative Citron Research report and seven-minute YouTube video. Citron Research, which is run by noted short seller Andrew Left, insists that Shopify is misinforming Wall Street and the investing public by padding customer numbers and fabricating success stories.

The e-commerce solution provider beat third quarter EPS estimates by seven cents in Tuesday's pre-market release and guided the fourth quarter above consensus, triggering an initially positive reaction that hit a buzzsaw of selling pressure despite a vigorous conference call defense against the Citron allegations. The stock dropped nearly 15 points below Monday's close, signaling growing doubts that could finally end the long-term uptrend.

The stock remained stuck below psychological resistance at $100 on Wednesday morning, with anxious shareholders still reeling from brutal October price action. More importantly, the latest selling bout broke a three-week bear flag pattern, printing a lower high while setting off highly bearish signals that should attract larger populations of aggressive short sellers in the coming weeks. (See also: Shopify Stock Falls to Critical Support Level.)

SHOP Weekly Chart (2014 – 2017)

 

The Canada-based company was founded in 2004 but did not go public on the U.S. exchanges until May 2015, opening at $28 and topping out at $42.13 a month later. The subsequent decline broke support at the IPO opening print in November and descended to an all-time low at $18.48 in January 2016. It tested that level in February, completing a double bottom and turning higher in an uptrend that has continued into the fourth quarter of 2017.

A two-legged recovery reached June 2015 resistance in August 2016 and eased into a narrow consolidation pattern ahead of a powerful January 2017 breakout that attracted immediate attention from the financial media and momentum crowd. Price rate of change escalated into the second quarter, more than doubling the stock's price while establishing the company as a top 2017 performer.

The uptrend eased in the third quarter, with round number resistance at $100 denying more than three months of breakout attempts. It finally cleared that barrier on Aug. 31, taking off in a climactic buying wave that hit an all-time high at $123.94 on Sept. 18. It rolled over and broke down from a month-long double top with support at $112 in early October, sending volatility and volume readings through the roof. (For more, see: Shopify Launches Ecommerce Channel for Gaming Companies, Integrates With Apple.)

SHOP Daily Chart (2016 – 2017)

 

A Fibonacci grid stretched across the 2016 into 2017 uptrend offers insight about the current trade setup. The initial October selling wave found support at the .382 retracement level while nearly completing a 100% retracement (inverted V) into the Aug. 10 low, which marks the inception point for the last rally impulse. In turn, this sets off a first failure signal that denotes an early warning for the end of a strong uptrend.

Price action after the first October low carved a bear flag pattern into the 50-day exponential moving average (EMA), which was broken decisively during the initial plunge. Tuesday's breakdown from this channel sets off strong sell signals, compounded by the second rejection at the moving average. A decline through the October low at $89.35 would further aggravate technical deterioration, while the summer low near $80 marks a line in the sand that bulls need to hold at all costs.

On-balance volume (OBV) warns of a bleak outcome, relinquishing 100% of the 2017 gains in just a few weeks through catastrophic distribution. These extremely negative readings raise the odds for a long-term top and a downtrend that shows little support until the mid-$40s. Current shareholders may wish to heed this technical warning and exit positions before selling momentum escalates once again. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

A series of bear raids triggered by Citron Research could bear fruit in the coming months, ending the strong Shopify uptrend while generating a selling spiral that could cut the stock's price in half.

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

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