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Why Shopify Inc (US) Stock Is Too Dangerous to Buy

SHOP is a great story stock, but a potential wave of profit-taking looms a little too close

By James Brumley, InvestorPlace Feature Writer

In late September, yours truly here suggested e-commerce platform Shopify Inc (US) (NYSE:SHOP) could, and likely would, live up to the hype. SHOP stock wasn’t there yet, but in time, what the company offers is more than marketable enough to existing and would-be e-commerce newcomers that aren’t stoked about working with, Inc. (NASDAQ:AMZN) or eBay Inc (NASDAQ:EBAY).

I still contend there’s something compelling about the company’s shtick, even though in a twisted sort of way Andrew Left’s criticism of the company in October wasn’t entirely off-base … even if not entirely relevant.

Just for the record though, the compelling long-term future for Shopify doesn’t necessarily mean SHOP stock is bulletproof in the near-term. And right now, Shopify stock is teetering on a technical support line which, if broken, could bring some short-term pain to current shareholders.

SHOP Stock: Teetering on the Edge

For those not familiar with the company, Shopify is a relative newcomer to the e-commerce space, providing a platform for would-be online businesses that aren’t big enough to matter to Amazon, and for budding e-commerce outfits that aren’t getting enough business from a weakening eBay.

The company isn’t profitable yet, but the revenue-growth trend is impressive, and it is expected to be in the black next year. It’s still a startup though, and like most new companies looking to take a bite out of an established market, Shopify is going to go through some ups and downs that wreak havoc with SHOP stock.

And a little bearish havoc is on the radar.

The daily chart below is what it is. While the rally that began all the way back at the beginning of the year finally wound down with the September peak, SHOP stock has done a pretty good job of holding on to the bulk of that gain … with the help of a support line (yellow, dashed) that was established back in May, and it has been tested — and verified — several times in the meantime. Even Monday’s low was limited by this technical floor.

Click to Enlarge

Each time a floor is tested, however, it gets a little weaker, dented and dinged until it’s no longer solid. This is the eighth time this floor has been tested.

However, perhaps more alarming for SHOP stock than the continual retests of a major support level is the shape of the chart we’ve seen along the way.

It’s more or less a head-and-shoulders pattern, with the September peak serving as the “head” and the November and July peaks serving as the “shoulders.” This pattern is often a warning of danger, signaling that the undertow has already turned bearish. The tipping point is a move below the neckline, or the support level that has kept Shopify shares afloat since May.

Looking Ahead for SHOP Stock

We’re not over the edge of the cliff yet, and as such, we can’t and shouldn’t make any assumptions about what’s in the cards for Shopify stock.

If SHOP stock can’t break this all-important floor that makes up part of the head and shoulders pattern, the clue is irrelevant. It’s a threat too big ignore though. A break under that support line could set the stage for a slide all the way back to the $70-ish area … a tumble that’s about the same distance between the neckline and the top of the head.

To that end, it should be noted that should such a selloff play out, it’s not an indictment of the company. It’s merely an indictment of the market’s hot and cold nature when it comes to the treatment of new and often contentious stocks.

In this particular case, a steep short-term selloff would actually serve as a long-term buying opportunity in SHOP stock. Shopify’s story remains one that’s easy to build a bullish case around.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media,

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