May 19, 2010 Dow Chart pattern: Continuing Head and Shoulder pattern

I thought I would put up the latest chart of the Dow with my lines drawn to show the Head and Shoulder or "W" pattern formation so you know how far we are in completing the pattern and what is to be expected in the days ahead. The Blue lines on the chart are what has transpired up to today except that to the right of yesterday's data is how the "W" pattern could be completed. Understand the shape and timing of the rest of the pattern is unknown, but the shape of a "W" is clearly visible.

Today is starting out as a down day, as Futures point to a lower open but also, European country markets are all down at this time by more than 2.0%. Asian markets were down as well by 0.5% by the Nikkei to as much as 2.5% in Singapore Straits Times. For a clearer picture of market direction the next few days, watch the volume today to see if it is equal or greater than yesterday's Volume and how the price action goes, up or down. My bet is market will continue to go down this week and then rally up the beginning of next week before a bigger selloff in early June.

The VIX closed at 33 yesterday but I expect a spike between today and Friday of up to 40 again. The Put to Call ratio during the day yesterday stayed between the range of 0.87 and 1.02, which is not at the extremes of recent daily movement. I would expect this ratio to spike at the time of the reversal of the current drop. Without this spike, I wouldn't believe the move up in the market as the Bulls are wishing for, would be real. It would be more likely a pause in the down trend and not a return to the Bull rally of the past year.

New data out this morning for CPI was not good for Gold investors as the Core CPI for April was -0.1%, making this the 4th consecutive month of either zero or a negative number. This indicator clearly shows we are in a deflationary period. There is no real inflation and in my view this means no real recovery. Inflation will come in due time, but until the economy truly recovers, don't look for inflation. This makes the Gold trade look stupid right now as it is very speculative that inflation is about to rear its ugly head. I don't know how long the current Gold hype will continue but as soon as many recognize we are in a deflationary period, we will have a major selloff in Gold.