A High-Conviction Buy Signal Is Flashing for DraftKings Stock

Prior to the pandemic, DraftKings (NASDAQ:DKNG) was one of the most highly anticipated debuts in the markets. Thanks to a groundbreaking Supreme Court decision, online sports betting suddenly became a legitimate industry. Given how much Americans love gambling and sports, DraftKings stock was a no-brainer.

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

That is, until the novel coronavirus decided to ruin everything.

When it became clear that this was no ordinary pandemic, DKNG was caught gasping for air as it plummeted in March. With both the public and professional sports leagues being forcibly shuttered by the virus, DraftKings stock was rendered irrelevant.

However, sentiment improved dramatically in April and carried over throughout May as coronavirus cases receded and states began reopening. Later, various leagues released their reopening schedules, providing credibility to DKNG’s mercurial rally.

But even with the return of sports, not everything has panned out perfectly. For instance, though Major League Baseball opened its truncated 2020 season, trouble soon followed when several players came down with Covid-19. This forced the cancelation of some games, leading to volatility in DraftKings stock.

Yes, it’s an encouraging sign that leagues have resumed their seasons, taking unprecedented precautions along the way. However, that players – who are young, athletic, and well-cared for – would get infected meant that the coronavirus cares little for mitigation plans.

As well, the impact against baseball raises questions about the viability of football, the most popular sport in America. With football being a high-contact sport – after all, that is one of the main tenets of the game – this naturally causes apprehension for prospective investors.

No one wants to hold this bag, especially when the outside fundamentals seem so negative.

DraftKings Stock Is Sending Buy Signals

I must admit that I really struggled to craft this update for DraftKings stock. With U.S. coronavirus cases standing at very high thresholds, along with deaths numbering in the thousands every day, it’s hard to envision a successful return of sports this year. And without sports, there’s no case for DKNG.

However, the technical argument for DraftKings stock is very strong at this juncture. If I’m interpreting its chart correctly, we could be looking at a bullish pennant formation, which possibly represents a continuation of prior bullishness. I’ve included a link to Stockcharts.com’s explanation so that you can see for yourself and make your own decision.

According to technical analysis, the pennant formation has three major components: a flagpole, a pennant, and the subsequent upside move. In this case, I believe that the flagpole is represented by the enormous rally that occurred from the beginning of April through the end of May. As well, strongly rising volume aligned with the bullish price action.

DKNG stock technical chart
Click to Enlarge
Source: Chart by Josh Enomoto

From there, we saw some of that excitement wear off as profit taking occurred. Some enthusiastic bulls pushed DraftKings stock higher temporarily before the bears resumed control. This back-and-forth kept going until DKNG hit a possible bottom around mid-July.

A tug-of-war later ensued but the overall range of movement started to tighten. The collective price action I described represents the formation of the pennant, with the recent tightening possibly forming an apex. At this point, the discipline of technical analysis suggests a high probability move that DKNG will break out.

Another point to consider is that DKNG stock is one of the most popular trades on Robinhood. Say what you want about the platform or its members, you don’t want to jump in front of this train.

Take What the Market Gives You

Looking over the horizon, the situation involving the pandemic isn’t very encouraging. According to a recent CNBC report:

White House coronavirus advisor Dr. Anthony Fauci said Friday that the chances of scientists creating a highly effective vaccine — one that provides 98% or more guaranteed protection — for the virus are slim. Scientists are hoping for a coronavirus vaccine that is at least 75% effective, but 50% or 60% effective would be acceptable, too, Fauci, director of the National Institute of Allergy and Infectious Diseases, said during a Q&A with the Brown University School of Public Health. “The chances of it being 98% effective is not great, which means you must never abandon the public health approach.”

If Fauci’s prognostication is accurate, it suggests we could suffer a painful second wave. Thus, investors shouldn’t lose sight of this risk.

At the same time, I can’t ignore the technical signals supporting DraftKings stock. If you’re a risk-tolerant trader, you may want to take what the market is giving you and sell it later. This doesn’t have to make sense over the long run, just so long as it makes sense today.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/a-high-conviction-buy-signal-is-flashing-for-draftkings-stock/.

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