Recently I received an email from a follower asking me what to do with his $NFLX holdings, on which he is down 40%. I am not going to mention his name as it would be inappropriate, but I am going to share my response as it could be useful to other people in similar situation. I like to receive emails and I always try to answer to the best of my knowledge:
Buying broken momentum stocks is not a sound approach, unless you are trying to bankrupt yourself.
First of all, it is very dangerous to own momentum stocks on the other side of the mountain. When the trends is over and a stock is trading below its declining 50dma, you are playing with fire when you go long.
Second, I’d suggest you to never average down – start with a small position and wait to be proven right, before you add.Third, when you buy, assume that you could be wrong and always have an exit strategy. You can’t expect that you will always be right. No one is.Also take into account opportunity cost. While you are waiting to be proven right (it might not even happen), there will be many other stocks that will provide better opportunities. Holding to a losing stock and hoping for it to bounce is like holding to a merchandise that no one wants (the market clearing price is not higher)Regarding NFLX – it depends on your trading horizon. I don’t know the future, no one does. All I know is that currently the stock is in a downtrend on a daily and weekly time frame, meaning that I could not consider it on the long side for something more than a scalp on a 30min time frame.I realize that you are down a lot on your NFLX holdings and you are not willing to sell now, because you would realize a loss. Guess what, you already have the loss. A simple question, you should ask yourself: is NFLX the best stock you could buy right now on the long side and why. From my perspective, it isn’t. Even if it rallies in the next few weeks or months, what are the guarantees that it will outperform many other names. There are better alternatives.Take care,
