After Double-Digit Fall, Is It Time for a Bullish DraftKings Stock Bet?

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It’s been a champion play for bullish investors, but is DraftKings (NASDAQ:DKNG) still worth a wager? Let’s review what’s happening off and on the price chart for DKNG stock, then offer a risk-adjusted determination to beef up the odds and success while avoiding a truly bad beat.

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For online sports betting upstart DraftKings, 2020 has been a heck of a year to hang out its ‘Open for Business’ sign as a Nasdaq-listed company. With states legalizing collegiate and professional sports betting, the ease of virtual transactions and a wildly popular brand within fantasy sports leagues, what could possibly go wrong?

So far in October, DKNG stock is down more than 13% compared to a 6.3% increase in the Nasdaq Composite index.

DKNG Stock Thrived in Bubble

It’s not exactly a secret the novel coronavirus and ensuing fallout of Covid-19 pandemic tested the possibilities of what could be grimly possible as sports leagues across the globe were shuttered. But from the Bundesliga kicking off team play in late spring and other major leagues following suit the past few months with successful bubble tournaments and/or abbreviated sports seasons, sports are making a successful comeback despite the odds. And DraftKings has emerged as a winner.

That’s not to say betting on shares of DraftKings has been easy. And already more than a few investors have learned that lesson once or twice.

Unofficially, DraftKings was dealt a numbing hit when shares crashed 45% during the worst of March’s broad-based bearish correction. But that was before SPAC Diamond Eagle Acquisition merged DraftKings and gaming platform SBTech into today’s DKNG stock. And to be fair, even the market’s largest stocks and Covid-19 winners such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) were brought down onto their knees, not just back alley dealings.

Officially, there was a sweat-filled June and early July for DraftKings investors after its April 24 debut as the stock lost roughly 38% from its market capitalization. But shares had already more than doubled. Moreover, DKNG wasn’t finished fighting. New highs were made as recently as late September. And today’s near $19 billion large-cap market valuation and year-to-date gains of around 365% point at a company that’s obviously been making the right moves by Wall Street.

Does Winner Take All?

The question now is whether DKNG’s winning ways can continue? There’s little to suggest otherwise. Most recently, a collaboration with Disney’s (NYSE:DIS) ESPN unit should be a big boon. And InvestorPlace’s Matt McCall, a guy who knows a thing or two about 10-bagger investments, is bullish. Bottom-line, the deal stands to increase traffic and retention for DraftKings when fans are on ESPN catching up on everything and everyone related to sports. Now that’s a win-win, right?

Sure, there are arguments that competition from the likes of MGM Resorts International (NYSE:MGM), Penn National Gaming (NASDAQ:PENN), Wynn Resorts (NASDAQ:WYNN) or privately held FanDuel will cut in on the action. But is this really a winner takes all market? Probably not.

Still, what if the market for online betting isn’t as big as advertised by a fairly enthusiastic sell-side on Wall Street? It’s always a possibility I suppose, but so is the opportunity for larger-than-forecast growth to play out. As well and without worrying too much about bearish what-ifs, the price chart today is simply pricing in odds of a buyable correction and not a stock that’s down for the count.

DKNG Stock Weekly Price Chart

Click to Enlarge

Source: Charts by TradingView

All stocks correct. And stocks of DKNG’s caliber, which have enjoyed periods of above-average price momentum and a favored narrative, routinely fall prey to bearish cycles that can leave investors second guessing their investment or pulling the plug entirely. It’s easy to appreciate as hard-hitting declines of around 30% are par for the course. And that’s in a healthy market like today’s environment. Currently, DKNG appears to be in just this sort of cycle.

Technically, and as the illustrated weekly chart reflects, I’m a fan of buying DNKG stock on corrective weakness. Ideally, that would be as shares decline on either side of 30% into Fibonacci and potential trend support where a new pivot low can form before DraftKings works its way to new highs. Specifically, this area is roughly from $41 to $46.

The reality is investing is rarely ideal. Shares can fall short or blow cleanly through our technical expectations. Still and for the time being, waiting for a weekly bottoming candle to develop alongside a more supportive stochastics setup makes sense. And when that day does arrive and regardless of where a low in the stock does form, a protective hedged strategy using DraftKings’ options can beef up the odds and success and help investors avoid future bad beats.

No stocks owned: On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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