Is There an Opportunity Brewing in Shopify Stock?

SHOP Stock
Credit:iStock.com/SARINYAPINNGAM

SHOP Stock: Coinciding Levels of Price Support Will Determine the Merits of This Investment

Shopify Inc (US) (NYSE: SHOP) stock has been under a tremendous amount of pressure following a report from a short seller that contained allegations that the company’s business model is a “get rich quick” scheme. This pressure has resulted in lower SHOP stock prices and many are wondering if this is an opportunity or the beginning of much worse things to come for Shopify stock.

In order to get a better grasp on this question, I turn to what I know best, which is analyzing the company’s stock chart. Using the company’s stock chart to generate a view on an investment is called technical analysis, and I have been using it effectively to create investment strategies for almost two decades. It was this method, after all, that caused me in December 2016 to label SHOP stock my rockstar top pick of 2017. The performance following this labeling is a testament to the value that this method of analysis can provide.

Before I delve into the SHOP stock chart, let me point out that in August, when the stock was trading at around $106.26, I outlined in a publication titled “Eyeing These Important Metrics on the Shopify Stock Chart” that there were coinciding levels of price support, and that if I were inclined to enter this investment, I would wait for these levels to be tested first. These levels have yet to be tested but they still remain significant.

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These coinciding levels of price support are illustrated on the following stock chart.

Shopify stock chart

Chart courtesy of StockCharts.com

First off, let’s begin by describing the price action that has dominated the landscape on the Shopify stock chart since January 2016.

This landscape contains a bullish trend, which contains the quintessential characteristic that defines all bullish trends: a series of higher highs and higher lows. This price action is simplified when it is characterized as taking “two steps forward and one step back.” This sequence is responsible for creating and sustaining the move towards higher stock prices.

This move towards higher stock prices is captured using a simple uptrend line, which was created by 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 level of price support. Every time the uptrend line has been tested, buyers were eager to jump in and support this metric.

The uptrend line has coincided with the 200-day moving average. This metric is highlighted in red on this stock chart. It is created by averaging the stock’s closing price over the preceding 200 days and plotting that value on the stock chart.

The 200-day moving average acts as a dividing line used to distinguish bullish investments from bearish ones. Distinguishing between these two polar opposites is determined by which side of the 200-day moving average the investment is trading on. Trading above the 200-day moving average is bullish, while trading below it is bearish, it’s just that simple. In June 2016, SHOP stock broke above this metric, and it has been trading above it ever since.

I stated in August 2017, that if I were inclined to enter or accumulate a position in Shopify stock, I would wait for these coinciding levels to be tested because entering a position at this level would be optimal in terms of risk.

Currently, Shopify is trading north of these coinciding metrics. As a result, I still have the inclination to believe that higher stock prices are on the horizon, and therefore, the recent weakness stemming from the allegations continues to act as an opportunity to acquire or add to a position.

There is a caveat, of course. If Shopify stock ever manages to fall below these coinciding metrics, it would serve to suggest that perhaps there is some merit to the allegations, because breaking below these levels of price support would imply that the bullish trend towards higher stock prices that began in January 2016 has concluded, and therefore, lower stock prices are on the horizon.

Analyst Take: 

Allegations are swirling around Shopify stock that is quite damaging, causing people to question the merits of this investment. I have the inclination to believe that as long as SHOP stock is trading above these coinciding levels of price support, the allegations are false, and therefore, the current sell-off presents an opportunity. Falling below these coinciding metrics would suggest that the allegations are indeed substantial, and therefore, lower prices are on the horizon. Due to these uncertain circumstances, I would wait for a test of these coinciding levels before initiating or accumulating a position.