In my early posts I wrote about Dow 30 industrial average index and how it seems to me as overvalued compared to fair value of those stocks that included in it. Here I will list all the stocks inside the Dow 30 index and their fair values and the prices they are trading with in market. Based on the fair values of these stocks, a conclusion about if the Dow 30 is overvalued or undervalued or stable and has fair value can be made.
Price of Stock
Fair value of Stock
AMERICAN EXPRESS CO
CISCO SYSTEMS INC
WALT DISNEY COMPANY
GOLDMAN SACHS GROUP INC
HOME DEPOT INC
INTERNATIONAL BUS MACH CORP
JOHNSON & JOHNSON
JPMD JPMORGAN CHASE & CO
MERCK & CO INC
PROCTER & GAMBLE CO
RAYTHEON TECHNOLOGIES CORPORATION
TRAVELERS COMPANIES INC
UNITEDHEALTH GROUP INC
WALGREENS BOOTS ALLIANCE INC
EXXON MOBIL CORPORATION
Stocks Prices Compared to their fair values as of March 20, 2021
The above table listed all the 30 companies that are listed in Dow 30 with their prices and their fair values. There is some notes that should be clarified to make the above table reliable.
The above table is not a recommendation for any stock in any trade, if you want to buy or short any stock do your due diligence and make sure that your investing or trading systems align with the information listed above.
The assumption used to estimated the fair values of all the stocks above is as if theses companies growths’ are similar to the USA GDP growth which is 2.2%.
Some of the above fair values is in minus (-) which does not make sense, but it can provide a clue about how these stocks are completely overvalued.
Number of overvalued companies are (14) which is have the companies in the Dow 30 index, that might be the reason why the DOW 30 still in uptrend or sideway, and traders should exercise caution if they want to short stocks in uptrend with high momentum.
Traders can use their systems to look for short term deals that presented for them by market movement, investors on the other hand need to stick to stock fair value instead of its price, because even if there will be bear move the market at the end will appreciate the stock fair value and move toward it.
Stock fair value is something completely different than its price which is listed in the market that affected by the law of supply and demand. The wise investors need to distinguished between these two things and never buy stock that its price higher than its fair value and, never sell stock that its price is lower than its fair value.
The Dow 30 index is a general index that measure the sentiment of the US equity market as well as investor in long run since it consist of the main 30 companies that affect the market and the economy in general. This index shows if the market is going in uptrend, downtrend or sideways. Because of that I used this index as a base for my analysis and I used all companies inside this index in order to come up with my index which shows the real value of Dow 30 index. My index which I am going to call it Sam 30 index is based in Dow 30 index as benchmark to all investors and traders alike to see if the Dow 30 index is an overvalued or undervalued or has fair value.
I am not going to describe the process that I did to come up with Sam 30 index, instead of that I am going to discuses how does Sam 30 index can be used in conjunction with the Dow 30 index in order to allow investors and traders see if there is an opportunity to go long or short or even to step aside and do nothing.
Let us assume that the Dow 30 is 30,000 points and Sam 30 is 23,400 that means the Dow is greater than Sam 30 with more than 6600 points, which means the Dow 30 is overvalued and investors should not invest in the market , and traders on the other hand should apply their technical analysis to see an opportunity for shorting any overvalued stock in this market. The same is true if the Dow 30 was 23,400 points and Sam 30 was about 35,000 that means the market is undervalued and investors and traders should look for an opportunity to go long with any undervalued stocks.
Sam 30 is not day by day index, instead is an index where its value updated whenever new earning report released by the companies that built the Dow 30 index. Once the earning report released for any company of those 30 companies that listed in Dow 30, Sam 30 index will be updated to its new value in the next day.
As of December 7, 2020 the Sam 30 value is 22,495.92, that means, when we do our analysis that described above, the market is overvalued
Comparison between Dow 30 and Sam 30
As you can see above the Dow 30 is greater than Sam 30 with more than 7,700 points which means that the market is overvalued and I suggested that investors to step back and do nothing while traders can short any overvalued company based in their technical analysis.
Head and Shoulders is one of the most known and successful pattern in money markets. It always appears where the price is reverse, means that when price move in uptrend and its about to go down, or the other way when price moving in down trend and the price want to reverse to up trend. It also appears in different time frame which means that you might not notice this pattern in daily time frame but when you go deep and search for it in lower time frame such as 4 hours, one hours or may be 15 minutes time frame you will notice it.
First I am going to put a picture for real chart of price movement in one of financial market that has the head and shoulder pattern, and then I am going to explain the philosophy and psychology behind this pattern and its formation and why it is so profitable.
As you can see from the above chart for Apple stock. The stock moved from almost May 2018 at price 141 $ to reach its top in March 2019 which was 230 $. It took the stock just three months or about to reach its starting price which was 141 $ and that after a successful formation of Head and Shoulder pattern. That means if someone was watching this stock closely and found that this pattern formed and short/sell Apple Stock at the right shoulder, she would make in three months as much as the one who bought this stock one year ago.
But in order to master this pattern and know where is the right moment to enter trade like this you have to know the psychology and the other traders emotions that helped the price to move that way and formed this pattern. And here we are:
The price moves in regular up trend where its formed higher lows and higher highs as the picture below.
The price moved from point 1 going up until it reach a resistance in point 2 and then drop in pull back movement. (as figure below shows)
When price reached point 3 which considered as support, price continue its movement upward until it reached point A.
When price reached point A it find a resistance there which was stronger than the resistance found in point 2 which made the price dropped in strong move down than the previous one that made price dropped from 2 to 3, and then point B formed which worked as support and helped price to move up.
In the price movement from (A to B), the price found strong sell momentum that made it drop strongly than the previous drop from 2 to 3, this momentum can consider as high sell volume but not greater than the volume that made price go up from point 3 to A.
Then price which found support in Point B go up slowly to point C, and when I said slowly I mean that this movement lack the momentum and/or high volume. Always this movement has MACD bearish diverging and/or RSI bearish diverging which means that the price in C is higher than A, while the two assigned points for A and C in MACD and/or RSI are going in down trend as shown below.
As you can see in the above figure the price of Apple stock made new high and uptrend while the MACD and RSI were making down-trend, and this is what I meant about bearish diverging which is a good sign but not the only one for Head and shoulder formation.
Back to our pattern explanation:
Once the price barley reached point C, it will drop with high momentum and strong volume to reach point D. This high momentum and strong volume helped the price to break the up-trend pattern and formed the first lower low in the pattern which is point D.
Once point D is formed, the wise trader who followed the trend will reconsider her positions, and think hard to either keep her position or exit this long position that she entered in point 1. But she still waits for good bargain and good price to sell her share. She does not trust this up trend pattern anymore specially when there was a contradiction in the main principle of uptrend which is forming higher highs and higher lows, and now there was new lower low which formed in point D. Even if she does not know any thing about volume or momentum or how to read it, but she only knew that this contradiction in the price movement that lead to form new lower low does not make her feel right and the market is going to do something else but not going up. At this point this wise trader will decide to exit her long position as I said that she entered in point 1, but she will wait for right moment to exit with maximizing her profit, and that will happen only when price move up and reached point E and failed to go more further than that.
At that time she will know that this price is either going to go sideways or down which will be no good for her, and she with other wise traders who think the same way decided to exit their long positions that they entered in point 1 when price reached to point E which is another contradiction for up trend when price formed lower high.
The price will reach point D with low volume and low momentum which prove this movement was just a reaction to the previous strong movement that made it drop from C to D. Once those wise trader exit this long move started in point (1) especially after they see price started forming lower highs and lower lows which is a sign for down trend, their exit will combined with the high momentum and volume of sellers who caused the up momentum of previous up-movement from 3 to A and from B to C to fade , and only then the price will drop in strong movement from D to reach the same level that it started with, which was point (1). This is exactly what happened in Apple’s stock movement in the previous figure.
But how can trader make sure that the head and shoulder pattern has been formed and its good time for trading this pattern and making some money, this is what I am going to show in the coming points:
First of all, the trader must make sure that the pattern has been formed and satisfied the following point with accuracy not less than 90% or more, if it is less than that she must not enter this trade as head and shoulder pattern formation. And these points are as following:
The price should go down to point B in strong move, stronger than the movement that made it stop in point 3.As shown in the previous figure.
The movement that took price up after that to pint C should be equal or less stronger than the previous movement that took price down to point B. That means the bearish has a strong power that equal to or greater than the bullish which made strong believe that they are able to take the price down.
To make sure that point 3 is satisfied the next down movement for the price will make new support point which is lower than the support in point B, which is D and this point will make sure that those traders will have confusing and the long position they entered is no more valid and they should re-consider their position by exit it and take their profit.
Those long traders who decided to exit their long positions will hold those position to get the maximum profit by waiting until the price reach point E. The price movement to point E will have lower and weak movement compared to movement from point C to D which means the price moved as consolidation or reaction to the bearish movement and the bearish just resting and willing to take the price down again to make new lows.
Once the price barley reached point E with low momentum and weak volume the bearish will took the control and drive the price down again and the price will be ready to broke all down levels and reached to the place where all this was starting to the beginning of this up movement.
Here is some other considerations about point ( A, E) which consider the two shoulders of this pattern as well as points (B,D) which consider the Nick-line for this pattern:
Point E (right shoulder) should reach the same level as point A (left Shoulder) which means that point A should work as Resistance for point E and prevent it from going higher than this level, and its totally recommended to have down trend between these two points. (as shown below between left and right shoulders).
The same is true for point B and D, it’s totally recommended to have down trend between these two points as shown in the figure below:
Finally, head and shoulders is not that famous pattern as other patterns, but once this pattern started forming, trader should pay clear attention to it to make sure its completed all its characteristic explained above, because it will be completely profitable for traders of all markets types. This pattern can be found in revers way which called “Revers head and shoulders” pattern which make markets reversing from down-trend to up-trend. The same principle applied in head and shoulders pattern can be applied in Reverse head and shoulders pattern but instead of sellers taking controls in head and shoulders pattern, the buyers will take the control and will take the price from low prices to more higher prices in revers head and shoulders pattern.