To properly frame the bull thesis on DraftKings (NASDAQ:DKNG), one needs to consider the concept of the Internet of Things, or IOT. DraftKings fits well as a play on the digital migration of everything online.
DraftKings stock took off like a rocket after March, rallying 300% earlier this year off the Covid-19 bottom. I bet that those who bought the stock on June 22 wish someone had told them to exercise a little patience and find better entry points, as that was a painful top for them.
In the middle of June I wrote an article warning against chasing DKNG blindly, as the rally was too strong for its own good.
The bullish thesis back then was that they had an advantage while the crowds businesses competitors are still hampered by virus fears. Here we are almost two months later and still no vaccine, yet DKNG is 20% still below my watermark.
Chasing the masses without considering the resistance levels is dangerous business these days. Machines do most of the trading and they rely heavily on prior price action for their decisions.
Consequently, buying a stock going into a prior fail is not a good idea. It is best to wait for a new breakout or better yet buy the dip.
If You Liked DKNG Before, You’ll Love It Now
In this case, DraftKings tumbled 30% and latecomers to the stock suffered heavy losses pretty quickly. Its strength on the way up became its weakness on the way down. It rallied so fast that it built a very sharp rising wedge, and those are vulnerable to sharp corrections.
DKNG sliced through several lines of support but it did hold $27.50 per share. So far the bulls are trying to stay one step ahead of it over $30. If they are successful in doing so then they can start to rebuild confidence to mount another rally to new highs.
It’s better to wait for a breach of $39 per share and chase that potential. Otherwise, investors should simply buy the dip closer into the $27 zone.
Buying the stock here regardless of chart levels means committing for longterm potential. This is a totally acceptable way of patient investing in this stock.
Today’s note is more of a trading strategy for the short-term. This is important because the company is going into an earnings announcement, and the reaction to those is completely binary regardless of the quality of the results.
Even if we had the P&L statement in hand ahead of time, we couldn’t predict how investors will react to the news. Wall Street has been finicky of late, and there’s no logic to earnings days reactions.
Investors’ Risk for Appetite is Huge
Stock markets are setting records yet we still have incredibly bad economic conditions. The VIX is twice as high as it should be, and when there is uncertainty investors don’t like risky equities.
DraftKings stock is definitely risky because it is still in its infancy, and this makes it very expensive. However that’s acceptable for a long term leap of faith. Those who know the business well can ignore valuation risks and have more confidence than those trading the price action.
They say that price is truth and during this year of complete tumult, relying on technical analysis from the charts is the difference between success and failure. Traders who have the skills definitely have an advantage over the other side of the trade.
Knowing the right levels that matter for DraftKings stock means making fewer mistakes in such a volatile environment. Otherwise investors are likely to be reactive rather than proactive. Success often comes from being prepared and studying the charts could be the edge that makes the difference.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
