Shop the Drop With a Short in Shopify Stock

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SHOP stock - Shop the Drop With a Short in Shopify Stock

Source: Shopify via Flickr

Off the chart Shopify (NYSE:SHOP) recently delivered once again. But in today’s riskier market environment, there’s still time, profits and value in shopping for a deeper price drop in SHOP stock by shorting shares. Let me explain.

Don’t get me wrong, e-commerce solutions provider Shopify has largely continued to deliver above and beyond Street expectations on paper. Last month’s third-quarter profit and top-line beat backed up with solid mid-double-digit revenue growth and raised sales forecast all but supports the idea of cackling and chortling Shopify bulls.

Nevertheless, the reality on the SHOP stock price chart has been somewhat different for Shopify investors thanks in large part to a broader market that has remained under the grip of bearish sentiment. Ongoing and raised concerns of slowing economic growth, trade war tensions and a less-accommodating interest rate environment have been steady headwinds for high-flying growth names like SHOP stock and equities in general.

Net, net, while Shopify’s narrative looks overall good for long-term investors, the better value is to shop for a continued drop in Shopify shares on a price chart still under pressure and still in search of stronger value.

SHOP Stock Weekly Price Chart          

SHOP Stock: Shop the Drop With a Short in Shopify Stock
Source: Charts by TradingView

If you can’t beat them, join them — with a short sale in SHOP stock. That’s how I see today’s advantage setting up on Shopify’s weekly price chart. Again, don’t get me wrong. Shopify shares have endured a fairly common and typically healthy-size corrective move of just over 30%. And that’s typically bullish.

The bad and more pressing news is in a risk-averse trading environment, a correction of this magnitude can be a good deal less supportive. In fact, the price action in SHOP stock could be the beginnings of a more bearish market. And right now I wouldn’t bet against it.

The fact is, on top of a more challenging market, SHOP has established a downtrend from its highs following a handful of weekly bases prone to a larger correction. Coupled with Shopify’s stochastics, which appears bearishly supportive of lower prices, it’s time to shop alongside Shopify’s bearish 10% short-interest for a move towards $100 and a test of the 50% retracement level.

Trading SHOP Stock

For traders agreeable with SHOP stock heading lower, shorting shares into Friday’s bid is a way to position within the downtrend at a higher price and in theory, with less risk. Having said that, placing a stop-loss above the market is critical to minimizing the exposure.

The recommendation would be to use a stop slightly above Tuesday’s pivot high of $140.12 to exit a short position in SHOP stock. Alternatively, the 200-day simple moving average or weekly pivot high could be considered. However, given the larger leeway on the price chart, smaller position sizing is a smart practice.

Traders might also think about shorting SHOP as bearish momentum picks up. Positioning below last week’s candlestick low of $130.90, which would serve the purpose of reaffirming a pivot high within the downtrend, looks reasonable. Here too, I’d recommend using one of the three discussed stops to keep losses contained to an acceptable dollar amount.

Lastly and for traders demanding their short risk in SHOP stock has a guaranteed stop, using a “moderately’”bearish Dec $130/$115/$100 put butterfly spread for up to $2.35 is a favored strategy that offers today’s bears and possibly tomorrow’s bulls a nice risk-to-reward profile.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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