Shopify (NYSE:SHOP) stock has taken investors on a wild ride. If you thought last week’s epic 53% rally was a sign that the descent was done, you awoke to disappointment on Monday. The Canadian-based e-commerce juggernaut opened down 10% and fell further to close down 12.38%. The dramatic descent made SHOP stock the biggest loser on my watchlist by a large margin. But all is not as it seems. A closer inspection reveals much of the move was a mirage.
It’s a misleading message born of conflicting price data between intraday and daily charts. I’ll unravel the mystery in a moment, but the real takeaway from today’s analysis is that SHOP stock has yet to break above resistance and thus remains in a downtrend.
That said, it is knocking on the door and arguably has its best chance at finding a bottom since topping late last year.
Not All Is As It Seems With SHOP Stock
Most of the time, you can trust what you see on the daily price chart. Zooming into the intraday movement will simply mirror, albeit, in greater detail, the action displayed on the daily time frame. Unfortunately, SHOP stock provides a unique case of what happens when you get bad data. Usually, it gets fixed quickly, but as of the close on Monday, there’s still a glaring discrepancy between the daily/weekly charts and intraday.
To wit: the daily chart shows Shopify leaping an epic 18.7% Friday in a squeeze for the ages. Meanwhile, the intraday charts show SHOP only rising 5%, which seems much closer to the moves seen in other momentum names.
In other words, Friday’s session high was $780 on the daily view but only $693.60 on the hourly or another intraday time frame. If you’re wondering which one to believe — use the intraday chart.
Since the daily close printed artificially high on Friday, Monday’s down day looks dramatically worse than it actually was. Again, that’s if you believe the intraday time frames tell the tale (which I do). The daily chart says SHOP dropped 12.38%. The intraday says it only fell 1.1%.
I find the easiest way to depict the difference is with a screenshot of both time frames. Let’s start with the daily.
Why It Matters
The reason this matters is that it changes the analysis. The daily chart suggests SHOP stock broke above a daily resistance level for the first time in months. It makes Monday’s giveback all the more jarring. The best breakouts don’t gap back below resistance to negate the breach one day later. They see swift follow-through quick gains providing instant rewards to traders who bought the break.
But if the intraday time frame is painting the accurate picture, then Shopify hasn’t broken out. Monday, then was a consolidation day, allowing prices to digest sellers coming in at the ceiling. The fact that we only ended down 1% and created somewhat of an inside bar is constructive and could set the stage for a better breakout trade. One that arrives after multiple days of pause and sparks a new upswing.
A SHOP Stock Options Trade
If you’re willing to bet the stock breaks out and makes a run for $800, then here’s the play. For a trigger, consider using Monday’s high near $715. Clearing it will officially break the previous pivot high from March 1 and reverse the daily trend. I think either a bull call or bull put spread work for gaining exposure. Because of the stock’s sky-high volatility, the bid-ask spreads are wider than I’d like. That makes limit orders a must.
Here’s a call spread that will capitalize on a move toward $800.
The Trade: Buy the April $750/$800 bull call spread for around $10.50.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
