Shares of e-commerce juggernaut Shopify Inc. (SHOP) fell more than 6% in the minutes following Tuesday's pre-market earnings release, even though the company beat lofty fourth quarter profit estimates by six cents per share. Shopify reported in-line revenues but failed to raise first quarter or fiscal year 2019 guidance, marking the first time those estimates weren't ramped higher since the 2015 initial public offering.
It's likely that the stock is selling off because in-line fiscal year guidance is raising fears that Shopify's impressive growth trajectory is slowing and will no longer support its mind-boggling 247 forward price-to-earnings (P/E) ratio. Slowing growth is anathema to hot momentum plays because it often signals that a company has matured and is attracting a variety of competitors that will take market share.
SHOP Weekly Chart (2015 – 2019)
The company came public at $28 in May 2015 and entered an immediate trading range with support in the upper teens and resistance in low $40s. It broke range resistance in September 2016 but stalled quickly on top of new support, grinding sideways into January 2017, when it took off in a strong uptrend that attracted a steady momentum bid, nearly tripling the stock's price in less than 10 months.
Buying pressure eased above $120 in September 2017, yielding a pullback into January 2018, when committed buyers returned, triggering a February breakout that added more than 50 points into July's high at $176.60. Price action since that time has been confined within a horizontal trading range with support near $115. The stock posted a nominal new high just above July resistance earlier this week, pulling back into this morning's confessional.
The rally into July 2018 tracked a trendline (black line) that was violated in October on the arithmetic chart and August on the logarithmic chart. It remounted that resistance level in January 2019 during a vertical buying impulse that carried nearly 60 points in seven weeks. This one-sided action has attracted many weak hands, raising the odds for a deep slide that could ignore the trendline and reach the 50-week exponential moving average (EMA) in the mid-$140s.
The weekly stochastics oscillator crossed into a buy cycle in early January and entered the oversold zone just three weeks later. This morning's downturn could trigger a bearish crossover that predicts four to six weeks of relative weakness. The monthly indicator entered a buy cycle at the same time but still hasn't reached the overbought level. This conflict between time frames predicts a more balanced tape through the rest of the first quarter.
SHOP Daily Chart (2017 – 2019)
A Fibonacci grid stretched across the uptrend that started in February 2016 places 2018 range support at the .382 retracement level near $116 (red line). That price zone aligns well with the .618 retracement of the rally impulse that started in October 2017, highlighting the importance of price action between $115 and $124. That makes sense because it also marks the level of the February 2018 breakout above five-month range resistance.
The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in September 2017 and plummeted in October after activist short seller Andrew Left and his Citeon Research released a bearish video on the company. Price action has generated a sequence of bearish divergences since that event, with price hitting new highs while OBV slumps near 2016 levels. The last divergence set into motion just this week, when the stock posted a nominal new high but the indicator failed to pierce March, July or December peaks.
The stock has settled in the mid-$160s ahead of Tuesday's opening bell. A bounce could have trouble piercing $170, while sellers could easily drop price into the 50-day EMA at $155. It will be hard to ignore bearish volume divergences unless the stock heads toward $200 on heavy volume because they warn that 12-month price action may be carving a topping pattern that eventually yields a breakdown into the double digits.
The Bottom Line
Shopify stock is selling off after the company failed to raise 2019 guidance, while the long-term volume structure indicates that smart money has already stepped aside.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.