Why Red-Hot DraftKings Stock is Cooling

More than fifty trading days have passed since the DraftKings (NASDAQ:DKNG) IPO, and it’s been a wild ride. That said, let’s dive into the twists and turns, and I’ll also provide two trades. The first is a bearish idea for traders banking on the nascent weakness to continue, while the second is a high probability play for DraftKings stock bulls.

DraftKings logo on a phone
Source: Lori Butcher / Shutterstock.com

Gravity Is Taking Hold of DraftKings Stock

Legalized sports betting is still in its infancy, and there aren’t many public companies that give you pure exposure to the industry. In turn, you can chalk this up as one of the biggest reasons for DraftKings’ popularity since its Wall Street debut. As a digital sports entertainment and gaming company, DraftKings offers sports betting and iGaming opportunities, as well as daily fantasy sports.

It took a few days (three to be exact!) to find its footing. But once the floor was in, buyers chased the stock higher by almost 160% in a mere six weeks. The launch created an unsustainable uptrend. And at that pace, DraftKings stock would have been up by some 1,400% in a year. However, while not impossible, it’s incredibly unlikely. And like so many post-IPO runs before it, DKNG shares cooled.

Collectively, the shift didn’t become apparent until June 22. On that fateful day, a nasty bearish engulfing candle formed on its second-highest volume session ever. The reversal marked a severe rejection at its old resistance pivot and started a double-top pattern. Some chart watchers call it the “M” pattern because it murders the uptrend. The completion and confirmation of the ominous formation come when support is broken. And, as labeled on the chart, the breach happened on June 26 and officially turned the trend lower.

DraftKings Stock Daily Chart
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Additionally, high volume accompanied the breakdown — increasing the likelihood that the reversal was the real deal. And since then, we haven’t seen anything to change the bearish narrative; Not from a technical analysis perspective anyway.

We did see a weak rally after the breakdown, but all it did was show that old support became new resistance. The past three down days are the result of the failed recovery bid.

With the 50-day mark now past, we have enough data to create a 50-day moving average. It just cropped up in the chart as the blue line that Tuesday’s candle is pushing below. If we close below the indicator, it will be yet another reason for caution. Stocks that are trending below the 20-day and 50-day moving average are not bullish.

Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Lastly, my final thought on DraftKings stock chart is how well-behaved it’s been. The patterns are clean, and traders are respecting support and resistance. The trends have been easy to spot and trade around. So for all of these reasons, DKNG is a must-watch stock moving forward.

Two Tempting Trades

Overall, the bear case is simple. All of the technical signals mentioned above suggest the path of least resistance is lower. Today’s low is testing the support level at $30.75, and I want to wait for a break below it before pulling the trigger on bearish trades. Given the stock’s sky-high implied volatility of 104%, I prefer buying a spread over long puts.

Bear trade: Buy the $30/$25 put vertical for around $2.30.

Because of the popularity and long-term growth potential of sports betting, I won’t discount the appeal of using this drop to acquire shares of DKNG closer to its IPO price. The high implied volatility means out-of-the-money puts are expensive and thus ripe for the selling.

Bull trade: If you’re willing to buy 100 shares near $22.5, then sell the Aug $22.50 puts for $1.00.

If we sit above $22.50 at expiration, then you’ll capture the max gain of $100. If we sit below that price, then you’ll be obligated to buy 100 shares at an effective purchase price of $21.50.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/07/why-red-hot-draftkings-stock-is-cooling/.

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