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In the movie Old School, Vince Vaughn’s character (Beanie) would often tell his son to “ear muff it” before he would say something inappropriate. While this is obviously meant to be funny, more often than not, a trader is best served by “ear muffing it” and just blocking out the noise. It seems that the past few weeks, the markets are gapping in opposite directions almost daily, and with the volatile moves comes all form of noise trumpeting everything from the end of the world to the buying opportunity of a life time. Just “ear muff it” and pay attention to price action.

After the sudden drop in August, the markets have been basically trading in a well defined range. Sure, it has been quite volatile from day to day; but in general, the markets have been confined to a channel in the lower half of the decline. The channel is sloping upwards resembling a bear flag, although it is still to early to know if that scenario will play out. We are actually in an interesting crossroads. The markets retraced about 2/3′s of the rally off last July’s lows, and as any''Fibonacci''expert knows, if the markets push back past the 61.8% retrace level, it would imply a full 100% correction.''

While this chart paints a possibly bottoming picture, the markets have also already retraced about 1/2 of the recent declines. ''This paints more of a bearish picture on the intermediate term. Maybe they will rally through the full 61.8% retrace towards 126 on $SPY in the near term, but the point is that until we break out of this range to either side, the likely scenario is more chopping around.

So while every sharp move or shocking data point will suggest otherwise, just put your ear muffs on and watch what market participants are doing. Soon enough the market will reveal what its true intentions are.

Good Trading,

Joey