We present a Chandra X-ray Observatory ACIS-S variability , spectroscopy , and imaging study of the peculiar binary containing the millisecond pulsar J1023+0038 . The X-ray emission from the system exhibits highly significant ( 12.5 \sigma ) large-amplitude ( factor of 2–3 ) orbital variability over the five consecutive orbits covered by the observation , with a pronounced decline in the flux at all energies at superior conjunction . This can be naturally explained by a partial geometric occultation by the secondary star of an X-ray–emitting intrabinary shock , produced by the interaction of outflows from the two stars . The depth and duration of the eclipse imply that the intrabinary shock is localized near or at the surface of the companion star and close to the inner Lagrangian point . The energetics of the shock favor a magnetically dominated pulsar wind that is focused into the orbital plane , requiring close alignment of the pulsar spin and orbital angular momentum axes . The X-ray spectrum consists of a dominant non-thermal component and at least one thermal component , likely originating from the heated pulsar polar caps , although a portion of this emission may be from an optically-thin “ corona ” . We find no evidence for extended emission due to a pulsar wind nebula or bow shock down to a limiting luminosity of L _ { X } \lesssim 3.6 \times 10 ^ { 29 } ergs s ^ { -1 } ( 0.3–8 keV ) , \lesssim 7 \times 10 ^ { -6 } of the pulsar spin-down luminosity , for a distance of 1.3 kpc and an assumed power-law spectrum with photon index \Gamma = 1.5 .