The S&P 500 had a strong rally from a low of 3492, climbing to 6165. This surge was backed by plenty of liquidity and support from institutional investors. After a dip to 4842, which was close to the pre-COVID high of 4804, the index consolidated. This was a moment when more funds started investing, and hedging activities declined. From the range of 4842-4804, the index jumped to 7000. This rise was driven by trend-following strategies and less volatility. However, the pattern above 6900 showed signs of “parabolic exhaustion.” Leveraged funds took short positions as protection while dealers absorbed institutional demand, noted in shifting COT structure.

Market Trend Analysis

As the index approaches 7000 and aims for 7240, it appears to be late in the current cycle. If it goes past 7240 with strong volume, it might face resistance between 7480-7550, with 7800 being a key target. A pullback from 7240 could lead to a decline to 6600-6420 or even 5140, which corresponds with the midpoint of the 3492-7000 range, all while maintaining a long-term bullish trend. The long-term trend remains positive; however, exhaustion is setting in. A pullback from 7240 is likely to happen before the index attempts to climb above 7800. Traders should prepare for volatility, shifts in hedging, and a correction phase before the next rise. The rally beginning from the 3492 panic low is still the key long-term driver, and the market is now close to a crucial point near 7000. This surge has been bolstered by years of liquidity and a drop in volatility, which has pushed the S&P 500 into what looks like a late vertical rise. We have seen similar movements before, especially during the late 2025 surge, which led to the levels we see today.

Investment Strategies in a Bull Market

As the index nears the 7240 resistance level, signs of exhaustion are becoming clearer, presenting opportunities for derivative traders. The CBOE Volatility Index (VIX) has remained low, closing 2025 with several weeks below 14. This usually suggests high complacency right before a jump in volatility. It indicates that option premiums, especially for puts, are relatively inexpensive ahead of a potential pullback. Market indicators from the fourth quarter of 2025 support a cautious approach. The NYSE Advance-Decline line did not confirm the index’s new highs, showing a bearish divergence with fewer stocks participating in the rally. This situation resembles the market conditions of late 1999, just before the major drop in 2000. Consequently, positioning for a sharp pullback by buying out-of-the-money put spreads targeting a decline to 6600 could provide a favorable risk-reward scenario. A correction from the 7240 area would act as a healthy reset, not the end of the primary bull trend. This kind of move would likely expand implied volatility, making it a great time to hedge long-only portfolios. A decline toward the 6600-6420 support zone would match a typical technical retracement. Once the correction stabilizes, probably in the coming months, the focus should shift back to the long-term upward trend. The ultimate target for this cycle remains near 7800. Traders could then look to position for this final rise by selling expensive puts or starting bull call spreads to take advantage of renewed upward momentum. Create your live VT Markets account and start trading now.

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