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Why It’s Not Yet Time to Buy DraftKings

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Relief finally arrived for DraftKings (NASDAQ:DKNG) stock this week. Back-to-back green sessions are giving the ailing sports betting company its largest two-day gain since peaking in September.

DraftKings (DKNG) logo on a phone
DraftKings (DKNG) logo on a phone

Source: Lori Butcher / Shutterstock.com

But, before you pull out the pom-poms and start cheering this on as the next great uptrend for DKNG stock, realize this. Nothing has changed structurally about the price trend, and bears remain very much in control of the situation.

That is today’s message in a nutshell. Now, let’s take a deeper look at the price chart and the sentiment surrounding companies like DraftKings.

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Growth Sentiment for DKNG Stock

Think about the characteristics of DKNG stock. First, it hasn’t been around all that long. The IPO was last April, so it’s only been a public company for 19 months. Second, it’s yet to report a single quarter with positive earnings per share. Third, it’s an innovative and potentially disruptive force in sports entertainment and gaming.

In sum, it has the potential for high growth but remains in its infancy with spotty earnings numbers. This places the stock squarely in the higher risk but higher reward camp.

Thus, shares carry a higher beta and follow other so-called growth stocks. Unfortunately for DraftKings shareholders, growth stocks have been very much out of favor over the past two months.

The Ark Innovation Fund (NYSE:ARKK) is a perfect proxy for the space. It owns DraftKings and a host of other growth stocks. ARKK had fallen 44% from its February peak at Monday’s lows. And 29% of the loss came just since Nov. 4. It lies at the epicenter of the recent carnage.

Ark Innovation ETF (ARKK) stock chart with sharp downtrend.
Ark Innovation ETF (ARKK) stock chart with sharp downtrend.

Source: The thinkorswim® platform from TD Ameritrade

Until the negative sentiment surrounding growth stocks changes, it will be difficult for DKNG stock to make any headway. I am encouraged by the vigorous two-day bounce in ARKK this week. It could undoubtedly signal a short-term low is in place. But, as you’ll see below, the rebound in DKNG hasn’t been near as impressive.

DraftKings Stock Charts

The weekly chart shows just how many of DraftKings’ gains have unraveled. Like many post-pandemic winners, the price descent has nearly mirrored last year’s ascent. DKNG now sits below the 20-week and 50-week moving averages. It’s about as oversold as it’s ever been, so a bounce would make sense here. Unfortunately, that, by itself, is hardly a reason to buy. It could be a reason not to sell or go bearish, but in my experience, buying a stock because it’s gotten so overextended to the downside is ill-advised.

DraftKing (DKNG) weekly stock chart with downtrend.
DraftKing (DKNG) weekly stock chart with downtrend.

Source: The thinkorswim® platform from TD Ameritrade

Moving to the daily time frame reveals how ugly the past quarter has been. We’re down more than 50% since September. Prices are submerged beneath a falling 200-day, 50-day, and 20-day moving average. Momentum increased on the last part of the descent, suggesting the downtrend is gaining, not waning, in strength. How can you be anything but skeptical of a rally that arises from such conditions?

DraftKing (DKNG) daily stock chart with bear retracement.
DraftKing (DKNG) daily stock chart with bear retracement.

Source: The thinkorswim® platform from TD Ameritrade

If you’re looking to bottom fish, I suggest waiting for more signs that the trend is turning – even if that means you end up buying at higher prices. For example, a double bottom or higher pivot low would help confirm selling pressure is finally drying up.

The alternate way to play here is to see if the stock can rally for a third or fourth day and then enter a bearish trade if prices fall below a previous day’s low. If that occurs, I like buying put spreads such as the following:

Bear Trade: Buy the January $30/$25 put vertical for around $1.50.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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