How I'm Handling Reddit as It Leaps Toward Its Price Target
Why Reddit continues to be one of the hottest stocks in the market and can it last?
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Banoodles.
That’s the only word I have for this market.
Let’s face it, when you set a target price for a stock, you usually don’t expect to hit that target within a week or two. That’s the type of market we’re in -- select high-flying momentum stocks are on fire -- so there’s no sense in fighting it.
The latest example is Reddit RDDT. We set our price target of $225 on Aug. 1. On that day, shares of the San Francisco-based social media hub opened at $182.
By Aug. 12, the stock reached that target, for a gain of 24% in just seven trading days.
Reddit launched from a cup-and-handle pattern (shaded yellow) after crushing earnings and revenue estimates. The $225 target was based on a prior area of resistance from February of this year (black arrow).
Reddit’s all-time intraday high is $230, so there is no prior price action to analyze above that figure. Because of this, creating another new target using traditional technical analysis methods would be pure guesswork.
Don’t overthink it. In this market, traders are using high-beta, technically overbought momentum stocks like Reddit and Robinhood HOOD because that’s what is working now.
Like my mentor used to say, keep using what works, until it no longer works, and then find something else that works.
That doesn’t mean we should ignore risk management. Since the price of Reddit has now reached a key inflection point, I’m going to trim my position size by one-third. That’s one way to lock in a gain while leaving room for more upside.
What Makes Reddit Unique?
Reddit shares have gained 53% in the past month, and 326% over the past 12 months.
What makes this social media company unique? Reddit is a community, or more precisely, a series of communities.
These communities, or "subreddits," can be used in a variety of ways. You can learn about a specific medical condition, or discuss a film with other viewers. Your favorite sports team has a subreddit where you can celebrate or commiserate with other fans. Your favorite band, travel destination, and cryptocurrency probably have their own subreddits.
There are other websites that provide a similar experience, but none of them have Reddit’s reach. Privately held Quora.com might be the closest competitor, but that site only has one-third of Reddit’s 1.2 billion users.
Bottom Line
Reddit is a very strong stock in a strong market. Both the stock and the major indexes are near their all-time highs. At least for now, the trend is your friend.
At the time of publication, Ponsi was long RDDT and HOOD,
