Buying on weakness in the stock market is a proven and time-honored strategy. But with Shopify (NYSE:SHOP), I’d caution investors against thinking it’s time to “shop” for a bargain in SHOP stock.
August was undoubtedly a tough one for the market — and for many growth stocks like web-based business solutions platform Shopify. With countering trade war jabs from the U.S. and China and an inverted yield curve, the monthly tally proved a tough one. Most major averages finished off around 1.5% in volatile conditions. And many growth names fared much worse, but not SHOP stock. Shopify shares actually finished up 21% while hitting market-leading new highs in August.
As most are aware by now, the broader indices did pick up the pieces and staged a bullish follow-through day on Aug. 13. And while it took awhile, the S&P 500 has even managed to confirm the historically strong market signal, with the market barometer hitting a couple marginal new highs in September.
Oh, what a relief — right? Actually for SHOP stock the reality has proven a good deal different for its bullish shareholders.
After demonstrating early technical leadership, Shopify unexpectedly shifted gears. Now it has been correcting the past four weeks. In fact, SHOP stock is down over $100 in share price — for a decline of 28% — since hitting an all-time-high of $409.61 on Aug. 27.
So, what the heck is really going on in SHOP stock you ask? You could point to the company’s recently announced $603 million secondary offering as a driver. And I get it. But I’d also suggest investors let yesterday’s headlines go.
Instead, let’s examine the price chart of Shopify and respect all-too-common market behavior to better explain today’s price predicament. And it’s very likely that a great opportunity for buyers is ahead in the coming weeks.
SHOP Stock Weekly Chart
Plain and simple, even the best stocks correct. Even today’s most celebrated household names from Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) or Home Depot (NYSE:HD) have had their periods of challenging price action.
When the inevitable correction does happen, stocks — as a general rule — will correct up to 30%, even during healthier market action. This appears to be the case for SHOP stock. And right now the evidence suggests this healthy, but bearish phase isn’t finished.
As part of its 28% correction, the weekly chart shows Shopify shares broke beneath trend-line support and beneath prior pattern resistance tied to a high-level corrective base last week. It would have been nice to see SHOP stock hold this upper support area, but it’s far from the last straw for buying shares on weakness if other lower technical supports are challenged during a corrective phase.
The SHOP stock price chart lays out the next level of support for investors at the psychologically pleasing $300 level. This price support also has the 38% Fibonacci level to back up its potential significance. But I’m unconvinced that it will produce a meaningful bottom for Shopify bulls.
The Bottom Line on Shopify Stock
With SHOP earnings still more than a month out and the weekly stochastics just now moving into oversold territory with no signs of bottoming, buying on weakness too quickly could be a big mistake.
A picture-perfect 30% yardstick for corrections would find SHOP testing $287 before all is said and done. But trading, as with life, is rarely so accommodating. And in a less forgiving environment there’s nothing to suggest SHOP stock can’t trade aggressively lower.
I’d reckon a challenge of the support zone from around $250-$263 — which holds the lower Bollinger Band, 50% Fibonacci level as well as the 40-week moving average — shouldn’t be dismissed. For now I’d recommend Shopify stock as a name for monitoring until a weekly candlestick reversal pattern might emerge in conjunction with a more cooperative stochastics setup.
Investment accounts under Christopher Tyler’s management do not currently own positions in 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 market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.