Shares of Reddit jumped more than 12% on Tuesday, leading a small one-day rally in the Nasdaq index.
The stock gapped higher in early trading following comments from analysts at Loop Capital suggesting that the selling in Reddit stock had been overdone. Wall Street analysts currently hold a buy recommendation on the stock with an average price target of $204.
Shares of Reddit have become technically oversold in the last week as the stock has seen extensive selling along with the broader market’s move. Shares are down more than 20% over the last five days, including today’s 12% move higher. But there’s a reason for investors to be wary of Reddit’s outlook.
Reddit, along with companies like Meta and Google, derives most of its revenue from advertising on its website and apps. In Reddit’s case, 98% of the company’s top line sales come from advertising. This is one area of the market that becomes incredibly weak when consumers begin to tighten spending ahead of perceived risks to the economy.
Last month, Reddit increased its outlook for the current quarter’s revenue and earnings per share estimates, but the increased guidance failed to increase investors’ appetite for the stock.
The slowdown in consumer confidence, and spending, will ripple through Reddit shares to increase selling pressure again.
On Monday, Reddit stock reached an oversold signal from its RSI indicator. This indicator signals when a stock has been statistically stretched higher or lower in a short period of time. Oversold signals often result in a short-term bounce as the stock follows the laws of math and regression to the mean.
Reddit shares also touched their newly minted 200-day moving average.
This trendline is one of the two critical trendlines that traders and investors watch for buy/sell signals.
The combination of the stock’s oversold reading and support from the 200-day moving average is the likely catalyst for Tuesday’s sharp bounce higher.
This means that investors buying into the “Reddit Bottom” should be cautious over the next week as the rally is more likely to turn into a “Dead Cat Bounce” instead of a long-term investable bottom.
A move back below the $105 level for Reddit will increase selling pressure again along with the $100 price level. Any break of the psychologically significant $100 price will target another 20% drop to a target of $80.
