Current Market Phase

The Dow Futures (YM) recently completed a five-wave pattern starting from the low on November 21, 2025, marking the end of wave 1. Following this, wave ((i)) increased to 49,299, then wave ((ii)) corrected down to 48,092. In wave ((iii)), wave (i) climbed to 48,686, while wave (ii) pulled back to 48,556. Then, wave (iii) rose to 49,463, followed by a small pullback in wave (iv) to 49,096, and finally, wave (v) peaked at 49,899, completing wave ((iii)). Next, the index corrected down to 49,001 in wave ((iv)), before moving up again to 49,899, which completed wave 1. Right now, the Dow Futures is in wave 2, showing a zigzag pattern from the peak of wave 1. Wave (i) dropped to 49,057, wave (ii) increased to 49,799, and wave (iii) fell to 48,689. Currently, wave (iv) is bouncing back to 49,095. We expect wave (v) of ((a)) to finish soon. After this, wave ((b)) will likely rally to cover the cycle from the January 13, 2026 high, before the index continues its downward trend within the larger corrective phase. The strong rally since the low on November 21, 2025, seems to have run its course, finishing a five-wave cycle. The market is now in a corrective phase, meaning recent gains have paused. This change indicates that strategies based on continuous highs may no longer be effective. This pullback matches recent economic updates. The CPI report for December 2025 showed a slight rise in inflation to 3.1%, surprising those who anticipated a cooling trend. Moreover, the VIX (a measure of market fear) increased from below 15 at the end of 2025 to around 20 now, indicating rising uncertainty among investors after the sharp rise. Based on the current situation, we anticipate a brief rally, or a “bull trap,” in the days ahead. Derivative traders may see this temporary rise as a chance to take bearish positions at favorable prices. This could involve selling call spreads or getting ready to buy puts as the market approaches resistance levels.

Strategy and Outlook

Historically, this pattern is common after a strong, multi-month rally. We observed similar healthy pullbacks in 2023. These consolidation times are essential before a larger trend can continue. Thus, our immediate focus should be on managing risk for potential downside. Once the corrective rally is over, the market is expected to decline again, completing the broader downward correction. Traders should look for signs of the rally losing steam to position themselves for potential profits from a decline. The main strategy in the upcoming weeks will be to take advantage of this expected second leg down. Create your live VT Markets account and start trading now.

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