DraftKings (NASDAQ:DKNG) has fallen 16% off its highs in just a few days. And while it obviously would have been prudent to book profits at the top, the market doesn’t ring alarms before stocks correct. Let’s not worry about the hindsight scenarios, but instead look forward to see where it would make sense to own DraftKings stock.
I begin with the argument that this is still a stock to own for the long term. Nevertheless, and for the sake of more active traders, we will delve into the levels that matter now.
First let’s set the scene that the drop was not DraftKings’ fault. The Nasdaq Composite index fell just as much and at the same time. For all we know the rally in DKNG could have continued if not for the index dragging it down. In August as markets went on crazy rally, few asked questions about that. They shouldn’t now, either, because this is merely normal price action on the flip side of the rally.
What goes up must come down and stocks do that for a reason. The dips serve the important purpose to bring in owners with better conviction.
DraftKings Stock is Doing Great
Year-to-date DraftKings stock is up an astonishing 370%, which is 14 times the performance of the Nasdaq. This is saying a lot because the tech sector has been on fire, yet DraftKings stock has eclipsed that performance.
At the root of the popularity of it is the quarantine that forced everyone to use the internet for everything. The complete global lockdown became a massive dose of adrenaline to businesses like this. It was no longer a choice to gamble online but a necessity. There were no open retail entertainment operations anywhere on the planet for months. That’s still the case. Even those that are open have only limited capacity.
This plays right into the hand of DraftKings because they are still benefiting from the social distancing movement. The proof is in the pudding and the price action on the chart confirm the bullish thesis for it.
The buyers are stepping in to support DraftKings stock on every dip. In early August I wrote about this saying that they will set new highs if they hold $30 per share. While valuations of it are still wild this early in his life, the price action offers clues. It is never an obvious point of entry at or near all-time highs. Incredibly this stock is still within an earshot of its high-water mark.
Negative Drag from Indexes Won’t Matter
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If the selling persists on Wall Street, DKNG could fall toward $44 per share. Between that and $40 per share would make for a good place to buy or add to current positions. The support zone extends for another $4 below that if this malaise lingers. The stock spent four months consolidating around these levels. It will take material change in its outlook to break through them. Simply put, expensive or not DraftKings stock is one to hold even through future tough times.
This year has been surprising from all aspects, so we should just accept that an expensive stock can rise exponentially. Tesla (NASDAQ:TSLA) proved this time and again as it reached ridiculus levels. Similarly, the faith of DKNG investors is strong enough that it can also continue to defy gravity on the charts.
The bears should avoid shorting this even if they have strong conviction in their thesis. It’s no use chasing the healthiest gazelle in the herd, it’s much smarter to hone in on the injured one. DraftKings stock is leaping with no material reason to slow down anytime soon. It will have weak stints, like in late June and late July, but those downturns were met with more buying.
Turn DraftKings Stock Trade into an Investment
From the August base, DraftKings stock rallied 78% before it took a little breather. And here we are fading a little, which should make the bulls smile. The opportunity to buy it cheaper has rewarded those brave enough to catch that falling knife. They say we shouldn’t turn a trade into an investment; I think this one can be an exception. If I get caught long, this stock during a swoon, even if extended, I would simply wait it out. I am confident that if the stock markets are higher in the future then so is this.
I expressed this opinion in my write-up early August. Back then my message was to buy the dip that was happening. Price was falling into a pivot point which in hindsight served as the base for this incredible 75% rally. Investors should not seek a home run every time. If they keep doing the right thing over and again, we will have more winners and losers.
Yes, I do like DKNG stock but don’t mistake this message for an all-clear to go all-in on it. Investors who want it for their portfolios can nibble. I would like it much better closer to $44 per share. There is too much extrinsic risk from politicians these days.
Patience may result in missing on some upside but that too is acceptable. Doing the right thing is rarely the perfect thing in hindsight. Nevertheless it should be the plan of action every time.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
