SHOP Stock: The Bull Market Is Fractured
The month of October has not been kind to stocks. I believe that this round of selling pressure has cracked the foundation of this bull market because quite a bit of technical damage has been done to the major market indices. Going forward, caution is warranted because I believe that the markets are in the process of putting in a significant top.
I am focusing on Shopify Inc (NYSE:SHOP) stock, because I believe it, too, is putting in a significant top. The truth of the matter is that when I took a closer look at the SHOP stock chart, Shopify stock was already exhibiting signs that a significant top was being put into place.
The recent bout of selling pressure that has hit this stock has only served to further reinforce my suspicions that the SHOP stock price has likely peaked and, therefore, is susceptible to further downside shocks.
The first signs suggesting that the move toward higher prices was beginning to abate were made evident in July, when Shopify stock broke below a significant level of price support.
This level of price support is highlighted on the following SHOP stock chart.
Chart courtesy of StockCharts.com
The above SHOP stock chart captures a bullish trend that has been in development since January 2016.
This bullish trend contains the quintessential characteristic that defines all bullish trends, which is a series of higher highs and higher lows. This price action is best described as a process of taking “two steps forward and one step back.” This process has been responsible for creating and sustaining the bullish trend in this stock.
This bullish trend was captured using a simple uptrend line. This uptrend line was created by simply connecting the series of higher lows that defined this trend. Not only does the uptrend line define the trend, but it also acts as a significant level of price support.
As a testament to its significance, every time the uptrend line was tested between January 2016 and July 2018, buyers were eager to jump in to support this trend line.
In July 2018, those eager buyers failed to step up to the plate, and Shopify stock broke below this uptrend line. This event is highlighted as a breakdown on the chart above. It was the first sign suggesting that the bullish trend was losing steam and that a significant top was being put into place.
The price action that followed was quite constructive. After breaking below the uptrend line, the stock price found price support around $130.00. From there, the stock price staged an advance to test the uptrend line from beneath.
Returning to test a previous level of price support from beneath is called a backtest. Backtests serve to reinforce that the original break below price support was legitimate, while simultaneously establishing the uptrend line as a new level of price resistance.
Backtests are very intuitive because they also have a habit of marking inflection points. This is why, after the backtest was completed, lower prices prevailed.
The recent bout of selling pressure has caused Shopify stock to break below another significant level of price support. This level of price support is highlighted on the following stock chart.
Chart courtesy of StockCharts.com
The metric highlighted on the SHOP stock chart above is the 200-day moving average. The 200-day moving average is created by averaging a stock’s closing prices over the last 200 days and plotting that value directly onto the stock chart.
This metric acts as a dividing line that is used to distinguish between bullish investments and bearish ones. Distinguishing between these two polar opposites is determined by which side of the 200-day moving average the investment is trading on. A stock trading above the 200-day moving average is bullish, while one trading below it is bearish.
In June 2016, Shopify stock broke above the 200-day moving average on a sustained basis. A bullish trend quickly followed.
The recent swoon in the stock price has caused it to break below the 200-day moving average, suggesting that SHOP stock is longer in a bullish state. Instead, a bearish shadow is now being cast on the share price, which is why I believe Shopify stock has put in a significant top and is susceptible to further downside shocks.
I am on bearish on SHOP stock. My beliefs are based on a number of technical indications suggesting that Shopify stock has put in a significant top.
As a result, I believe that lower prices will prevail over time. In light of these developments, I will maintain a bearish view on this stock until there are indications to suggest otherwise.