For a while, Shopify (NYSE:SHOP) stock could do no wrong this year. It rallied relentlessly above $400 a share but unfortunately for the bulls, at the end of August it tripped hard and fell into a 30% correction. But that is not the end because SHOP stock still has an opportunity for another 15% rally.
This may sound too optimistic, but the chart setup still favors upside. Momentum is still with the buyers — even after the correction, SHOP is still up 135% year-to-date. Clearly this is not a disaster results when the S&P 500 is barely up 18%.
It is important to first acknowledge that this ticker is not for the faint of heart. Shopify is a momentum stock, which means that it moves fast and long in either direction. When it rallies, it seems headed to the moon in a straight shot. But when it falls, it appears headed into an abyss. So it is hard to trade without strong technical know-how, because most times, it scares traders away.
Simply stated, SHOP stock correction may have ended and it now has a base below and an opportunity above. If markets rally, it will continue to out-perform.
Fundamentally, SHOP stock is not cheap since it still loses money and it sells at nearly 30 times its sales. So buying shares here means that investors are putting a lot of hope on revenue growth in the future. Usually, I don’t mind high valuations when I see a clear path to top line growth.
In this case, I lack conviction in that area, but I do like the chart. So consider today’s note as a technical trading opportunity rather than an investment vehicle.
Bet on SHOP Stock as it Continues to Outperform
Shopify stock’s correction ended above $285 per share. This is a pivotal zone dating back to May. Back then the stock broke out into a 45% rally which ended in late August. So now it’s trading in a range between the neckline and $332 a share. And therein lies the opportunity. If SHOP stock bulls can break above it and use it as support, they can ignite a 15% rally even against heavy resistance at $360 per share. This is where the tricky part comes in.
It is risky to buy shares and hope for the breakout. It is more prudent to wait for the breakout confirmation and then buy the rally. In essence you want to buy high and sell higher. That’s the part that makes this a trade rather than an investment.
So it is also necessary to set tight stops. If the price of SHOP stock goes the wrong way, traders need to be honest with what level gets them out of it. On a daily chart, $320 per share is significant from last week. But this varies as a matter of preference.
This breakout opportunity will definitely need the help of the markets in general. We are still in headline-trading mode, where strategy is hostage to news about the China trade policy, for example. On that front, this week and next, politicians of both sides will meet. It will be hard to get a deal but there could be cordial decisions to trigger upside. Conversely, any break in the talks and we will resume the fears that spiked last week.
I started right up front by saying that this is a trade more than an investment. This is an important point for any stock at this point in time, because investors opinions are bifurcated these days. Stock markets are near all-time highs, yet we appear headed into a recession. Even some of the economic data from the U.S. is deteriorating, so there are plenty of reasons to doubt the rally. But that also means that there are plenty of bearish positions with stop loss triggers just above current levels and if they trigger the market-wide rally will be violent.
The bottom line is that traders must be nimble regardless of which side they are on. The breakout in either direction will be strong. That makes it very important to place stops on any trade — especially for a momentum stock like Shopify stock.
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 for free here.
