Talking SHOP

Decided to write up Shopify Inc. (SHOP) tonight since it wasn’t included over the weekend and I ended up taking a position today. You’ll often hear me refer to how a stock acts or I’ll often say “that’s its character” in reference to the way price behaves at certain reference points. What I’m actually referring to are price patterns that can be noted in the charts and tend to repeat as part of a stock’s “personality”. Check out this weekly chart of SHOP and the highlighted areas.

(Click any chart to enlarge)

What we see here is a tendency for SHOP to consolidate prior gains below a flat 10 week moving average and then march steadily higher once it’s reclaimed on a weekly closing basis. Still the potential to be early here, but that’s why I mentioned the stop can be fairly tight. Additionally, those who were positioned on the short side for a double top to play out here may add some fuel to a potential rally with short covering with a 13% short float and 8+ days to cover. One of my favorite technicians, Brian Shannon from AlphaTrends, says “from failed moves come fast moves” and that’s what I’m looking for here as the potential double top pattern now appears to have failed…

 

Last night on twitter, I pointed out revenue growth of +72%, +71%, +66% and +62% for the previous four quarters along with triple digit EPS growth over the same period. Forward estimates are looking for 59 cents next year up from 19 cents this year. That’s over 200% annualized and those estimates have recently been on the rise with 5 upward revisions for next year in the last 60 days according to Zacks.com data. Additionally, fund ownership is on the rise each of the last four quarters having now increased to 665 from 530 a year ago. SHOP belongs to an A+ group with strong running mates including TWLO, BAND, COUP and PAYC. On the downside, the current accumulation/distribution rating of D- and up/down volume ratio of 1.0 are not ideal; but also are not stop signs, in my opinion, given the nature of the recent consolidation and the big volume (now failed) breakdown in late July. Will be looking for improvement in those checkpoints as price climbs the right side.

Chart courtesy of MarketSmith

The weekly chart on MarketSmith also highlights SHOP finding recent support at the 40 week moving average. The last couple bounces off that longer term support were good for nearly 50% moves over the following few months. I like the idea of SHOP for a swing trade here with a target of prior highs above $175. Depending on the path it takes, volume pattern and general market conditions, I could also envision a portion of this trade being held as a core for a breakout through prior highs and potentially held for a larger gain. Especially, as we get into the stronger seasonal period in the fourth quarter and eyes may be on the magnetic $200 level.

Disclaimer: I am long shares of SHOP at the time of this writing.