DraftKings Inc. (DKNG) has carved the oddest momentum rally of 2020, quadrupling in price off the March low despite the shutdown of every major sports venue, with the exception of horse racing, UFC, and a little boxing. eSports have taken up some of the slack, but it is clear that the optimistic bid is focusing on the bullish long-term outlook. Unfortunately, that's a tough chore, given the failure of sports leagues to successfully relaunch their seasons.
At least four college football camps have closed in the past two weeks due to multiple positive COVID-19 cases, raising serious doubts about the upcoming NFL and NCAA seasons. Sadly, leagues will do everything they can to understate the obvious risks because they're guided by dollars and cents rather than the lives of players and spectators. Also consider the fallout if a league starts up, plays a few games, and is forced to quarantine teams due to renewed outbreaks.
Wall Street remains strongly bullish on DraftKings stock, with growing odds for more states to legalize sports betting. The Street's eight "Buy" and one "Hold" recommendation highlight this optimism, with price targets now ranging between $25 and $55. The stock is currently trading about six points below the median $44 target, providing plenty of wiggle room for higher prices. Even so, the planned July 31 NBA launch needs to go smoothly or there is a risk of DraftKings stock seeing a wave of downgrades.
DKNG Daily Chart (2019 – 2020)
The current DraftKings was created in December 2019 through the merger of the former company with Diamond Eagle Acquisition Corp. and SB Tech. The stock popped above $10.00 after the merger, marking the first leg of a strong uptrend that topped out in the upper teens in February. An early March breakout attempt failed, giving way to a brief but painful slide that relinquished nearly 46% of the stock's value.
An early April test at the March low found willing buyers, yielding a steady uptick that completed a round trip into the prior high on April 21. The stock broke out immediately, booking greater-than-average volume in a channeled uptick that posted an all-time high at $44.79 during the first week of June. Investors have grown more cautious since that time, selling an uptick just below the prior high on June 22.
The stock dropped into the 20-day simple moving average (SMA) this month for the first time since April, bounced for eight sessions, and has returned to this short-term support level. The daily stochastic oscillator has turned lower in reaction to this mixed action, which signals a loss of momentum driven by recent legislative setbacks and pessimism about professional sports in 2020. A decline through $38 could set off a sell signal in this configuration, completing a potential double top pattern.
The on-balance volume (OBV) accumulation-distribution indicator highlights momentum buying interest in April and May, zooming to an all-time high with price. The stock sold off in a wide range reversal on June 22, just one day after posting the highest-volume session in its public history. It now looks like smart money sold that bid, which was probably initiated by the so-called "Robinhood traders."
A pullback could reach excellent support at the 50-day exponential moving average (EMA), which is aligning with the .382 rally retracement level in the low $30s. Long-sided exposure taken in this price zone could benefit from a strong bounce, but event risk could tighten the noose if more players get COVID-19 and plans to reopen professional and college sports runs into other pandemic roadblocks.
The Bottom Line
DraftKings stock has attracted the attention and capital of momentum traders in the past three months, but professional and college sports could easily fail in their hasty efforts to resume operations.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.