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Buy the Hindenburg Dip in DraftKings Stock?

DraftKings gets hammered on Tuesday thanks to allegations from Hindenburg Research. Is it a buy? Here's the level it has to hold.

DraftKings  (DKNG) - Get Report was dealt a tough blow on Tuesday, with shares tumbling almost 12% at one point on the day. The stock, however, has erased about half of those losses though.

Still, it comes at a difficult time for the stock. Assuming shares close lower on the day, it will mark the stock’s fifth straight daily decline.

At current levels, shares are more than 20% off last week’s high. So what happened?

Hindenburg Research alleged that the company’s acquisition of SBTech has dealings in black-market gaming and money laundering.

It probably spooked investors even more given that a prior Hindenburg target - Lordstown Motors  (RIDE) - Get Report - dived on Monday after the chief executive and chief financial officer agreed to step down.

That didn’t set a good tone for Lordstown and bulls in DraftKings are likely worried about the same thing.

With a solid bounce underway how do the charts look?

Trading DraftKings

Daily chart of DraftKings stock.

Daily chart of DraftKings stock.

In early May, DraftKings stock dove like the rest of the growth market. Reporting earnings at the time just gave traders an excuse to sell the stock, even though it was a buying opportunity. 

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The analysts came to the rescue a few days later

Shares chopped around the notable $45 level, but amid the volatility, this level did not prove to be the low. Instead, that came around $40.

However, on Tuesday’s flush lower, the $45 level did hold as support. Shares technically bottomed at $44.35 on the days. 

With a hearty rally underway, bulls don’t want to see that level retested in the future.

Specifically, they want to see the stock reclaim the 10-month and 50-week moving averages, as well as the $50 level. If it can do that, the 10-week moving average is on the table, followed by downtrend resistance (blue line).

That’s sort of the problem with DraftKings stock. While the stock held up pretty well in the first quarter (despite turbulence among its high-growth stock peers), shares ultimately broke down below $56 support and fell into a downtrend.

The $56 level later turned to resistance, as was proved last week. 

With Tuesday’s action, DraftKings is becoming a prove-it stock. It needs to prove that it’s worth owning by reclaiming key areas. That starts with $50.

Over downtrend resistance and the notable $56 to $57 area will be in focus, along with the 21-week moving average.

On the downside, I want to see Tuesday’s low hold. A close below this level opens up the May low near $40, then the 21-month moving average below that.