One of the most common ways to lose money in the market is to look at a stock that has sold off significantly and say, “Hey, this is down a lot. I will probably do pretty well if I buy simply because this thing is so beaten-down.” To be sure, there are traders out there who specialize in catching bottoms and mean-reversion trades. However, most do not fall into that niche. Instead, they simply buy and hope, grasping onto confirmation bias straws along the way to justify their positions. Invariably, though, most stocks in downtrends tend to go much lower than anyone would deem reasonable or possible, and stocks in uptrends do the same with respect to pushing to higher prices.
Netflix is bouncing hard today relative to the market, and the easy thing to do is look at all that potential upside back to all-time highs in the stock. I have remained bearish on Netflix and continue to do so, even though the stock is down nearly 40% since the last time I discussed it in-depth back in April in this post here.
The main reason, as I discussed above, is that using different chart scales when appropriate can help to undermine that common mistake of buying a stock simply because it “looks too low.” The updated monthly charts of NFLX can be seen below, using the two scales. Here, the logarithmic scale is still appropriate given the vast amount of appreciation and giveback by Netflix over the past several. years.
I would still resist the urge to pick a bottom here.
Please read this post I wrote last year about arithmetic versus logarithmic charts.