The SP500 (SPX) seems to be moving into the 3rd part of a 3rd wave, which is expected to lead to a final 5th wave. Earlier predicted patterns suggest the possibility of an overlapping ending diagonal (ED), which could affect the target zone’s lower limit (~7345). Recently, the index fell unexpectedly from its peak of 6986 down to 6789, breaking through the 4th warning level and making the immediate 3rd of the 3rd-wave scenario no longer valid. Now, the index shows signs of forming a larger ending diagonal with a 3-3-3-3-3 pattern. The rally from December to January had its W-a between 0.618 and 0.764 times the previous higher rally, which fits expected ratios. If the index remains above the lows of December and November, particularly last week’s low of 6789, the 3rd wave’s W-c could begin.

Target Levels And Divergence

The 3rd wave usually targets a 123.6-138.2% extension of the 1st wave, which we now expect between 7185-7235. This aligns with the 161.8% extension at 7218. Currently, there is no divergence between the Advancing/Declining line and the price, making a bearish outlook hard to support, even with the emerging ending diagonal. Once this pattern is completed, we anticipate a multi-month correction down to around 5800 +/- 300 before aiming for over 8100. The recent drop in the S&P 500 from its January 12 high of 6986 has altered our outlook. We now think the market is forming a more complicated, overlapping pattern called an ending diagonal, suggesting a bumpy final push higher rather than a straightforward rise. This perspective is backed by the CBOE Volatility Index (VIX), which has stayed relatively low, around 15, even during last week’s dip to 6789. There are no signs of widespread panic in the market, indicating that the recent dip may be a temporary setback rather than a strong trend reversal. This decline followed an unexpectedly high inflation report from early January 2026, which briefly lowered expectations for a more lenient Federal Reserve. In the coming weeks, it’s vital to monitor key price levels to manage risk. A drop below last week’s low of 6789 would signal a serious warning to reduce bullish positions. The crucial support levels to watch are the December 2025 low of 6720 and the November 2025 low of 6521.

Market Participation And Correction Preparedness

If the index decisively moves back above 6986, it would confirm that the next upward leg is starting, creating opportunities for bullish trades. Such a break would likely lead to a rally toward the target zone of 7185-7235. Typically, the final stages of a rally, like the one in late 1999, can be quite turbulent. Importantly, overall market participation is still supporting the upward trend for now. The cumulative NYSE Advance/Decline line is following the index closely and is not showing signs of negative divergence that often happens before major market tops. Without this internal weakness, it’s hard to justify taking a strongly bearish position at this time. However, since an ending diagonal is a terminal pattern, this rally may be nearing its end. As the index approaches our 7200 target, we should prepare for a significant multi-month correction down to the 5800 area. Cautious traders might want to plan ahead by considering longer-term protective puts or VIX call options as we near new highs. Create your live VT Markets account and start trading now.

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