Should Traders Double Down on DraftKings?

Ed Ponsi

I'd like to introduce guest contributor Ron Lembo to Ponsi Charts. Ron is the manger of Sonoran Vista Group, LLC in Scottsdale, AZ.

DraftKings Inc. (DKNG) has been on a wild ride in 2020. The stock rallied sharply at the start of the COVID-19 pandemic, but has cooled off for the past month.

Is this stock still a buy, or should traders search for a better prospect? Let's go to the charts to find out.

The first thing to understand is that sector rotation may be occurring in the markets. The Nasdaq 100, shown in blue, has been a big winner this year, but now appears to be turning lower (down arrow).

Meanwhile, the Dow Jones Industrial Average (green), which has under-performed the S&P 500 (red) and the Nasdaq, appears to be turning higher (up arrow).

comparison chart

 If money is moving into the blue chips, it could be moving away from Draftkings and a host of other speculative stocks. Sector rotation should be on the minds of traders who are thinking about buying any of the highly speculative names that have performed well in the first half of this year.

Now let's check the chart. DraftKings had a fantastic run in April and May. The online betting company saw its shares nearly quadruple from March 10 through June 1st. Then the stock stalled out, and is now trading about 25% off of its highs.

DKNG

During the month of June, DraftKings formed a bearish double top pattern (point A). The stock's MACD indicator flashed a sell signal on June 8th (point B).

Then in the first half of July, another pattern formed, known as a descending triangle (point C). That bearish pattern indicates the likelihood of another move lower.

With all of these bearish signals occurring on the chart, the possibility that money is rotating away from speculative stocks like DraftKings can't be ignored.

Yes, the stock could come back, but it's a gamble.

You can reach Ron Lembo at Rlembo65@gmail.com

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