The S&P 500 (SPX) is currently forming a diagonal Elliott Wave pattern that began from the low on November 21, 2025. This setup has five waves, with the first and fourth waves overlapping. The first wave, ((I)), rose to 6903.46, followed by a corrective wave ((II)) that ended at 6719.8. The index then climbed in wave ((III)), which further broke down into smaller impulsive waves, with wave (v) reaching 6945.77.

Related Market Movements

After this, a corrective zigzag pattern emerged in wave ((iv)), where waves (a), (b), and (c) completed at 6824.31. The S&P 500 has started to move upward again in wave ((v)), beginning with wave (i) at 6965.69. A pullback in wave (ii) is expected, but there may be more upward movement as buyers come in during a series of three, seven, or eleven swings. This pattern can be seen in the 45-minute chart as of January 7, 2026. In addition to this technical analysis, other market movements include a drop in gold prices in Malaysia, a weak Australian dollar due to trade data, and a stable US Dollar Index above 98.50. These trends show that market participants are being cautious. According to the current Elliott Wave structure, the S&P 500 is in the last upward leg of a pattern that started in November 2025. We expect a small pullback soon, which could be a good buying opportunity before the next move up. This is supported by data showing that the unemployment rate in December 2025 held steady at 3.9%, indicating economic strength. For traders, this suggests preparing for more upside in the coming weeks. Buying call options on the SPX or SPY with February 2026 expiration dates could be a smart move to benefit from the expected rally in wave ((v)). Alternatively, selling cash-secured puts near the anticipated pullback zone around the 6900 level can also offer bullish exposure.

Caution and Hedging Strategies

However, a note of caution is needed since this is the fifth and final wave of the diagonal sequence. Historically, finishing such patterns can lead to sharp reversals. This last advance is backed by strong Q4 2025 holiday retail sales, which showed a 4.2% yearly increase, possibly indicating a market peak. While positioning for immediate upside, traders should also think about hedging their portfolios. As the index approaches new highs, buying out-of-the-money put options for March or April 2026 could serve as affordable insurance against sudden downturns. Volatility, indicated by the VIX, has been below its 50-day average of 14.5 but could change quickly once this final wave ends. Additionally, the US Dollar Index has been rising above the 98.50 level. While the moment is currently focused on equity momentum, a strong dollar may become a headwind for earnings later this year. This is an important factor to watch as we approach the end of this upward market phase. Create your live VT Markets account and start trading now.

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