Sam Collins

Don't Fight the Tape

by Sam Collins   08/04/09

Gold (August contract) rose $2.90 to $956.60, and the PHLX Gold/Silver Index (XAU) closed at $153.51, up $4.89.

What the Markets Are Saying

I once took a course in point-and-figure analysis from one of the greatest technicians ever, Earl Blumenthal, who had lots of colorful stories and sayings. One of his truisms was, "A stock that makes new highs will continue to make new highs." And that is the story of the current run on the stock market.

Despite overvalues in the internal indicators, sentiment numbers that are begging you to short stocks, and disbelief by the most seasoned traders, stocks continue to rise.

Yesterday, two very significant barriers were breached: The S&P 500 closed above 1,000, and the Nasdaq finally made it through 2,000 after several unsuccessful attempts.

These barriers have little technical significance, but do carry some psychological weight. When they were breached on the downside in October 2008, the market went into a freefall that almost took the entire world economy along with it.

Now, 10 months later, the market, which is one of the most accurate forward economic indicators, is telling us that the world's economy has finally turned up.

Several technical indicators did reverse after negative signals. The slow stochastic reversed giving a fresh buy signal. And Moving Average Convergence/Divergence (MACD) turned up despite its overvalued status, and after losing some steam late last week, momentum turned up again.

So another truism, -- "Don't fight the tape" -- comes to mind. It is as relevant now as it was in October 2008 -- only the direction of the market is different.

"Be long or be wrong." Sorry, I just can't seem to help myself.