Shopify Inc. (SHOP) stock is trading above $500 for the first time on Wednesday morning after the company beat fourth quarter 2019 earnings per share (EPS) and revenue estimates by healthy margins. Revenues rose an impressive 46.9% year over year to $505.16 million, crossing the $400 million and $500 million marks for the first time. Upside guidance for fiscal year 2020 completed a highly bullish presentation, solidifying Shopify's reputation as a must-own growth stock.
However, the stock has now exceeded most analyst targets after nearly doubling in price in just three months. This vertical action has set off a number of overbought sell signals, lifting 2.2 standard deviations above the 20-month simple moving average (SMA) while carving no major pullbacks. While these extremes don't predict an immediate reversal, they are warning sidelined investors that risk now far exceeds potential reward.
Based in Canada, Shopify works with small businesses to build e-commerce sites and adds to that base income with digital payments and shipping networks. It wants to compete with Amazon.com, Inc. (AMZN) in five years, which could get easier if government regulators and the U.S president ramp up their complaints about Amazon's employment practices and growing market share.
SHOP Weekly Chart (2015 – 2020)
The company came public on the U.S. exchanges in May 2015, opening at $28 and lifting into the low $40s in June. August, September, and October breakout attempts failed, giving way to a steep downtrend that posted an all-time low at $18.48 in January 2016. That marked a historic buying opportunity, ahead of a recovery wave that completed a round trip into 2015 resistance in August.
A January 2017 breakout attracted momentum buying interest, lifting Shopify stock above $100 in June. The rally then eased into a shallower trajectory, posting a series of new highs into the June 2018 peak at $175.11. Bears took control for the rest of the year, carving a channeled decline that found support at a six-month low in December. Committed buyers returned in 2019, powering an uptick that broke out to new highs in February.
The stock posted impressive gains into the August 2019 high at $410, more than tripling in price in just nine months. It dropped 30% in the next four weeks, highlighting price action's extreme volatility, and tested that support level successfully in November. The subsequent uptick completed a double bottom reversal in December, setting the stage for a rally of 250-plus points into this morning's high above $500.
The weekly stochastic oscillator crossed into the overbought zone in December and has held this lofty level for the past two and a half months, highlighting impressive relative strength. The monthly indicator reached this zone in January but remains below the level that triggered a major reversal in August. Meanwhile, this morning's rally has just crossed the 2.00 Fibonacci rally extension, which has the power to stop an uptrend dead in its tracks.
SHOP Daily Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator topped out in August 2019 after a long accumulation phase and turned lower into November, hitting a six-month low. Buying power into Tuesday reached the 2019 peak, while volume activity after Wednesday's opening bell should lift the indicator to an all-time high, matching price's strong performance. However, although it seems unlikely, a down day would reinforce OBV resistance and set off a major sell signal.
Conservative market players looking to board this moving train should wait for an intermediate correction that reaches the 50-day exponential moving average (EMA), currently rising from $430, or the breakout level at $410. Meanwhile, aggressive players should proceed with caution because greed has now replaced common sense, adding substantial risk unless logical upside targets are identified and tight stops are utilized.
The Bottom Line
Shopify is trading at an all-time high after blasting through estimates, but huge gains since November 2019 may not be sustainable.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.