The fall from grace in DraftKings (NASDAQ:DKNG) has been a sight to behold. What was once a well-behaved, profit-generating stock for speculators has turned into a naughty, no-good money murderer. Today we’re chronicling its fall to the dark side and suggesting the best way for bulls and bears to trade DraftKings stock.
With nearly six months having passed since its IPO, we’ve moved beyond the window of uncertainty. Said another way, we now have enough price action to allow for in-depth analysis. Individual candlesticks have multiplied into pivots, and pivots have grown into trends. Both the 20-day and 50-day moving averages are now playing alongside price and provide secondary confirmation. We also have two earnings announcements in the books and a third coming around the corner. So fundamental analysts have at least some data to begin mining for insights.
In short, the IPO infant has grown into a toddler.
Unfortunately, shares of the digital sports entertainment and gaming company are experiencing growing pains. Let’s take a closer look.
DraftKings Stock Chart
While I’d normally cut right to the daily view on a stock with less than a year of history, I think the weekly chart is telling. There are two key takeaways. First, the stock is on a four-week losing streak that has created a 46% drawdown. We’re not talking about a mild bout of profit-taking led by a band of retail traders. What we’re witnessing is an institutional exodus that has cut the stock price nearly in half – in a single month.
I find that problematic. And it leads me to point number two. The severity of the drop has wholly retraced the September surge resulting in an epic failed breakout pattern. We didn’t just return to the old resistance zone ($45); we smashed through it, falling well into the prior range. That’s ugly by any measure and speaks volumes for just how relentless the selling pressure has been.
Here’s the bottom line: the weekly chart is neutral at best.
The past months’ decline has pulled prices below the 50-day and 20-day moving averages. The latter smoothing mechanism is now rapidly declining and confirms sellers control the short-term trend. What’s incredible/sad about the descent is we’ve only seen three up days since the Oct 2 peak. The selling, in other words, has been relentless.
$30 is the next support zone and marks the low of the range that preceded September’s breakout. While buyers can certainly step up before we get there, it is the logical next downside target.
And that brings us to how bulls and bears might trade DraftKings stock right now.
How Bulls and Bears Should Trade Now
The only problem facing sellers is the extreme oversold readings that have cropped up. Stretched prices are prone to rapid-fire reversion. No one wants to go short right before a bounce. Furthermore, the risk versus reward when shorting a stock already in the basement isn’t all that exciting. What I would prefer to see is a multi-day rally that carries DKNG back to its falling 20-day moving average.
Until then, I consider bear plays here high risk. If you can’t help but join the bears right now, however, I suggest using a break of $34.90 (the weekly low) as your trigger to confirm prices are continuing lower. And use a tight stop, so if the stock does pivot higher, you don’t sit through a large rebound.
On the bull side of the aisle, we’ve reached a point where bottom fishing is tempting. If you liked DraftKings at $65, then you have to love it at $35.
The stock is attempting to rise from the abyss with this morning’s 3% pop. If you think it’s the start of a sustained run, then consider selling puts.
The Bull Trade: Sell the December $30 put for $2.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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