After an incredible rally to $409 per share, Shopify (NYSE:SHOP) stock stock stumbled into a 30% correction. But fans of the stock battled back and forth so it found footing. Along the way, there were profits for both buyers and sellers, with almost four swings of 20% or more in each direction. Clearly Shopify stock offers opportunities for investors.
After a hard fall from August, it bounced off critical support under tremendous pressure on several occasions. This is important because it set a floor. Now Shop bulls have confidence in their setting so they can pursue upside potential. SHOP is still up 165% this year and had a fantastic rally last week. Clearly, the bulls have the reins now. Moreover, it still has more upside opportunities like the one from last week and the triggers are close.
Arguably it was already in a breakout once it crossed $345 with a 10% upside potential. But it delivered most of it in mere hours. So the easy work has already happened and now pressure will set in from the last failure zone back in September; therefore, the bulls will have harder work to do from here. Technically, it is important for the fans of Shopify stock to get above $378 quickly. Otherwise, they run the risk of developing a a trend of lower-highs. But there is no imminent danger of debacles without new headlines, so that alone is not reason to doubt the rally yet.
Shopify Stock Has Help
So far the equity bulls are in charge on Wall Street in spite of heavy negative rhetoric among experts. The S&P 500 is at all-time highs even when we are headed into important trade deadlines. The doubters are wrong because the situation is simple: The global central banks are committed to growth and cheap money. Furthermore, the U.S. macroeconomic condition is still on fire as we have learned on Friday with a fantastic non-farm payroll report. So there has never been a recession domestically while at full employment. The economic and corporate reports would have to completely collapse quickly to portend the hard correction scenario. Meanwhile, momentum stocks like SHOP will continue to have a tailwind from the bullish action in stocks.
It is important to note that this is not a cheap stock. So should there be trouble on Wall Street then the sellers will come fast. At the first sign of real trouble, investors in the equity markets will shed perceived froth first. So SHOP stock will be vulnerable to fast selloffs. The current valuation is expensive from the traditional sense, but that is always the case with relatively new growth stocks. So this alone is not a reason to bet against it.
Treat Shopify Stock Like the Momentum Stock It Is
Momentum stocks offer great trading opportunities. So it is okay to fade the upper ends of their trading ranges without being negative on the stock long term. When taken out, trading ranges bring about swing trades that yield short-term profits like the one SHOP did last week. This is to distinguish between an investment and a trade. An investor can be bullish SHOP long term but trade the stock from both side short term. A fast stock like this offers opportunities that are not there in more stable stocks.
The trick is to find pivot levels to trade. Last week’s breakout was predictable. As soon as Shopify stock broke above $345 it triggered a bullish pattern to target the $370 zone and it came quickly. So from here the next leg will probably center around a retest of the neckline so that the bulls can take out the high from last week. But there is also a small band of short-term support near $355 per share, and it could stabilize there first. But if it doesn’t, it should fall another $10 from there.
A rallying stock often needs to revisit prior resistance levels to establish support. So a small dip after a rally is natural. What is also available is the breakout that happens after the secondary push. For SHOP, if it breaks out above last week’s highs around $378 then it should target its all-time highs. While this is not a guarantee, it is a likely scenario that warrants tracking. Once the breach happens, the momentum buyers will take over the price action and the trade will be on. So those already long SHOP can stay in it while this scenario develops. Otherwise, it is the next bullish short-term trading opportunity.
Shopify has a lot of fans on Wall Street, so it is easy to see why some would prefer to simply own it for the long term. Fundamentals aside, today’s write up is to remind us that within any trading thesis whether bullish or bearish, there are shorter-term swing trades with many more opportunities to profit from stocks. This can be in addition to core positions in one’s portfolio.
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.