Why You Should Buy Shopify Stock as the Market Dips

Relative strength is important, so look for the signs

Shopify Inc (NYSE:SHOP) is a momentum stock so it moves fast in both directions. This makes it difficult to trade because once it swings upward, it appears that it’s too late to chase SHOP stock. Conversely, on the way down these stocks appear as if they are falling into an abyss.

Last May, SHOP stock fell on a headline that Adobe System Incorporated (NASDAQ:ADBE) had bid on SHOP’s competitor Magento Commerce. I wrote about that dip being an opportunity to buy Shopify stock for a trade. It immediately delivered at least 20% win and more than 100% for those who held it into the recent highs.

It takes guts to buy SHOP stock during these scary times. This is a frothy stock from the traditional sense. It sells at 30 times sales so it’s definitely not a bargain. But it’s value is in the growth it’s delivering, not the profit.

The world has gone digital and it’s never going back. Also the ramp up to the cloud is still in its infancy stage. So the demand for SHOP products and services will remain strong for years. So as long as the company continues to execute on plans then it will prosper and eventually grow into its premium.

Meanwhile, long-term investors in SHOP stock need not worry about the short-term stock gyrations — especially when they are because of the geopolitical headlines. The U.S. and China tariff negotiations have broken down completely. Moreover, it seems that the U.S. is also picking two new fights with Mexico and India. This is on top of the unrest in the middle east.

Needless to say that the investing sentiment is as bad as it was in December. But this time it’s different because the Fed is now on the side of the stocks. So this could be an opportunity for the shorter-term traders to reload long in SHOP stock.

Trading SHOP Stock

In spite of the fears on Wall Street, SHOP is still within 3% of its all time highs. Scared markets should not be buying stocks that are this frothy. So clearly this is not an obvious place to enter. There is no clear dip or catalyst to buy. But there is a lot to say about the relative strength that the stock is showing.

Yet here is SHOP holding up much better the stocks of the top companies  like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), or Salesforce.com (NYSE:CRM) who cannot find footing.

Unlike last time I suggested buying the SHOP stock dip. This time I want to buy the stock market dip.

Since SHOP is holding up strong then I expect it to rally fast as soon as this geopolitical market-wide malaise abates. So I will take cues from the S&P 500 rather for SHOP.

The downside target of this correction in the S&P has not yet reached its measured move off the Head-and-Should breakdown from $279. Last week we fell to the interim resting point around $274. But there is still room to fill the whole target into $268 or $264.

My overall thesis is still bullish for the macroeconomic conditions in spite of the tariff wars. There is too much at stake for things to complete disintegrate into a recession while we have full employment. It’s just not logical.

So whether we completely fill the downside target of this correction or not, I bet that there is a bounce coming and it will carry Shopify stock to new highs. So as soon as the S&P shows a trend of higher lows and higher highs I bet that SHOP will be off to the races.

Above $275, SHOP stock will get very interesting but the all time high is so close that it will take courage to buy it for a short term trade. But as long as there are tight stops below it’s the only way to really benefit from a momentum breakout. The idea is to buy high and sell higher.

Losing recent base lines would be problematic for the momentum. So I place my stops according to my risk tolerance. I expect to test $264.50 if the $270.50 zone fails.

The last earnings report cause a big spike from $228 per share. Clearly Wall Street saw results that made them realize that they needed to adjust levels. Such emphatic necklines usually make for strong supports. SHOP has several of these almost at every round number of late.

Most analysts who cover the stock rate SHOP as a BUY, but it is also trading above their average price target. While this is exciting, it leaves it vulnerable to big corrections if they start changing their minds. Investors are fickle just consider what happened to Nvidia (NASDAQ:NVDA) as it fell from grace at $290. While I am not calling for the same fate here but I am noting this to differentiate between an investment in Shopify stock and trading it.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/why-you-should-buy-shopify-stock-as-the-market-dips/.

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