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Reddit Stock and the Rubberband Effect: A Case for Lower Prices

Reddit logo seen displayed on a smartphone screen

Reddit (NYSE: RDDT) stock can rocket higher, and the rubberband strategy is one way to capture the gains. The rubberband strategy uses moving averages to target deeply oversold stocks that are ready to rebound, and if there are other factors in play, the rebound could be significant. Triple digits or more. 

However, anyone expecting a rebound in Reddit today may be disappointed in the outlook. While some moving averages support this market, more are against it. As good as rubberbanding strategies are, moving averages are much better suited for trend-following, and Reddit’s shares are far from oversold. Today’s moving average signal isn’t a buy signal but a sell signal that could shave 3.5% to 10% or more off the stock price before the next earnings report. A move below the critical support level, near $53, could lead to a much larger decline if the Q2 release fails to deliver. 

Rangebound Reddit Has Headwinds and Tailwinds to Drive Volatility

The best that can be said about Reddit’s technical outlook is that it is rangebound. The bad news is that it is moving lower within the range and below critical moving averages. Those include the 6- and 30-day EMAs, which are acting as resistance. There is evidence of buying in the candles; there are lower shadows on most, but the market is still above strong support targets, the closest being $54 or 2.5% lower, and risk is tilted to the downside. 

The latest signal confirms resistance at the pair of EMAs, accompanied by bearish indications in the MACD momentum indicator and the stochastic oscillator that points to lower prices. Why EMAs or exponential moving averages? They add weight to the more recent data and give a clearer view of what the market is doing today. 

Reddit RDDT stock chart

Short interest is an issue. Short-sellers have been in this market since the IPO and capped gains near $68. The latest data had short interest at nearly 20% of the public float, and there is also the float to worry about. Reddit is a low-float company; ample shares are available for the company’s purposes, and numerous large insiders are incentivized to sell when shares move higher, providing significant overhang for the market. In this situation, Reddit is unlikely to move above $68 without a change in the outlook.

Analysts are Raising Their Targets for Reddit: Risk Is on the Horizon

The analysts are vocal in supporting the business, so the downside could be limited. The 16 tracked by MarketBeat peg the stock at Moderate Buy and have been lifting their price targets over the last two months. The latest updates come from Citigroup and Needham & Company, which see it trading between $70 and $75. Among the drivers for the upgrade is the company’s plans to increase ad content across the platform. As it is, the ads are only shown to a limited audience, so the revenue boost could be significant if and when it materializes.

The next visible catalyst is the Q2 earnings report scheduled for early August. The analysts have been cautious with their estimates for revenue and earnings, leaving them unchanged since the quarter began, and expect modest sequential growth and adjusted profits. This sets the company up to outperform the consensus, but the whisper figures are much higher. The chatter on Reddit, home to the infamous r/wallstreetbets sub-Reddit, is that the stock is in an accumulation phase, gearing up for another meme-stock rally the Q2 release will catalyze. 

The Risk for Reddit Is a High Expectation: Market Is in Wait-and-See Mode

A high expectation among retail investors built into Reddit’s upcoming earnings release sets it up to disappoint the market. The recent surge in traffic suggests the business is booming, but the question is monetization. As it is, the best opportunity for improved monetization is with OpenAI and ad sales. The company enhanced its collaboration with OpenAI, allowing ChatGPT to access the API feed and embedding AI features into Reddit. However, the impact on revenue and earnings is questionable and may not be seen in the results until late in the year. 

Regarding ads, the company is increasing the number of ads and locations displayed, which may hurt as much as it harms. The bottom line is that Reddit’s market is in a wait-and-see posture, tilted to the downside, with a significant catalyst on the horizon. 

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