How to Trade the DraftKings Dip After Mixed Earnings

DraftKings is under pressure after beating on revenue estimates but missing on earnings. Here's how to trade the stock now.
Author:
Publish date:

Bulls will look to see if DraftKings  (DKNG) - Get Report can turn things around on Friday as shares trade lower by about 7% after the company reported earnings.

The report was mixed, with DraftKings beating on revenue and growing sales 23.6% year over year but missing on earnings. A loss of 55 cents a share came in well wider than estimates.

However, the company’s full-year revenue guide was better than expected. Given that the market tends to be forward looking rather than focused on the past - i.e. guidance tends to trump the quarterly results - some bulls are hopeful of a reverse.

They also know DraftKings may have the wind at its back. Penn National Gaming  (PENN) - Get Report is enjoying a fresh breakout, while Wynn Resorts  (WYNN) - Get Report, MGM Resorts  (MGM) - Get Report and others have been doing well lately too.

Unfortunately, the charts aren’t as clear for DraftKings as some of its peers.

Trading DraftKings Stock

Daily chart of DraftKings stock.

Daily chart of DraftKings stock.

Investors with a longer-term outlook could look at DraftKings and say it is forming one big bull flag. That’s after the stock’s rapid rise from to the June high near $44. Seeing a stock consolidate in this manner is not a bad thing.

In fact, many will argue that it’s a good thing and I don’t disagree. Perhaps that works fine for investors, but for traders, we need a bit more clarity.

This stock has been making a series of higher lows and lower highs, wedging it into a tighter and tighter trading range. For now, the 20-day and 50-day moving averages are rejected DraftKings stock on a bearish post-earnings reaction.

So here’s what I want to know now: Does DraftKings stock rotate below the current month’s low at $30.51 or the high at $36.17?

Above the high puts shares back above its key moving averages and puts $38 resistance in play. Above that opens the door toward the highs near $44.

Below this month’s low puts the July low and recent range support in play near $27.50. Buy-the-dip traders can consider nibbling near this level with a clear risk/reward profile. Below the July low puts the low- to mid-$20s on the table.