Sports betting and fantasy portal DraftKings Inc. (DKNG) emerged from the first quarter decline as one of the hottest stocks in the market universe, posting 2020 gains in excess of 600% into early October when it reversed after hitting an all-time high at $64.19. Abysmal viewership for abbreviated MLB and NBA seasons triggered a high-volume stampede for the exits, nearly cutting the price in half into last week's low at $34.90.
The stock has bounced strongly this week, riding the market's coat-tails during the post-election relief rally. Unfortunately for bulls, the recovery isn't going to happen overnight because the selloff posted exceptionally high volume, dropping accumulation-distribution readings to the lowest lows since April, when the stock was trading more than 25 points lower. In addition, the decline broke the closely aligned 50-day exponential moving average (EMA) and September breakout in the $40s, establishing strong resistance in that price zone.
The rally stalled at that barrier on Friday, perhaps setting the stage for a retest of last week's low, which is situated just above the 200-day EMA at $33. That raises the odds for a final selling wave, ahead of stronger 2021 price action, when everyone hopes to enjoy full-fledged sports seasons. In the meantime, DraftKings needs to cut even more deals with local governments to take advantage of growing support for online betting.
Wall Street consensus is stronger than price action, with a "Moderate Buy" rating based upon 13 "Buy" and 6 "Hold" recommendations. No analysts are recommending that shareholders sell positions and move to the sidelines, despite the 45% haircut. Price targets currently range from a low of $37 to a Street-high $76, while the stock is set to open Friday's session about $5 above the low target. This placement offers plenty of upside potential when macro headwinds dissipate.
A failed break occurs when a price moves through an identified level of support or resistance but does not have enough momentum to maintain its direction. Since the validity of the breakout is compromised and the profit potential significantly decreases, many traders close their positions.
DraftKings Daily Chart (2019 – 2020)
The company officially came public at $10.80 in December 2019 and entered a strong uptrend, lifting to $19.50 at the start of March. The pandemic selloff wave then dumped the stock 46% in just six sessions, undercutting the IPO opening print before finding support. It ticked sideways into April and took off in a strong advance, returning to the prior high at the end of that month. An immediate breakout caught fire, reaching the mid-$40s during the first week of June.
Price action then eased into a correction that carved a rounded pattern, with support at the 50-day EMA. It broke out once again in September, posting the all-time high less than four weeks later, while the subsequent decline failed to produce a single bounce lasting for more than one day. Daily relative strength readings plunged into extremely oversold levels last week, at the same time the selloff hit harmonic support at the .786 Fibonacci rally retracement level.
Fortunately for bulls, weekly relative strength has also hit deeply oversold levels, raising the odds for a multi-week recovery wave. However, extensive technical damage should limit gains, suggesting volatile sideways action rather than a quick assault to higher ground. In particular, accumulation needs to recharge after a major loss of sponsorship, and that might not happen until the pandemic runs its course and sporting leagues rebuild traditional viewership.
Relative strength is a technique used in momentum investing and identifying value stocks. It consists of investing in securities that have performed well relative to their market or benchmark. For example, a relative strength investor might select technology companies that have outperformed the Nasdaq Composite Index or large-cap stocks that are laggards against the S&P 500 index.
The Bottom Line
DraftKings stock may have bottomed out after a persistent decline, but technical damage predicts that it will take time to reestablish the uptrend.
Disclosure: The author held DraftKings shares in a family account at the time of publication.