The S&P 500 (SPX) is close to finishing a diagonal Elliott Wave pattern that started from the low on November 21, 2025. Wave ((i)) moved up, peaking at 6986.33. Then, wave ((ii)) formed a clear zigzag: wave (a) fell to 6885.74, wave (b) bounced back to 6979.34, and wave (c) dipped further to 6788.87, completing wave ((ii)) at a higher degree. After this correction, the Index continued upward in wave ((iii)), reaching 7002.28, followed by a pullback in wave ((iv)), which ended at 6870.8. The pattern is now in wave ((v)), showing impulsive movements. From the low of wave ((iv)), wave (i) reached 6971.09, and wave (ii) retraced to 6893.48.

Bullish Outlook Remains

The bullish outlook remains as long as the pivot at 6788.87 holds. If this level stays secure, any pullback should draw in buyers within a three- or seven-swing sequence. This trend supports the chances for more upward movement as the diagonal pattern develops. The overall setup suggests the Index may gain strength in the near future. We see the S&P 500 slowly rising, nearing the end of a diagonal pattern that began late last year. This structure indicates that the current upward trend is losing energy and could be near its conclusion. For traders, this is a signal to be more cautious about potential gains and prepare for a possible reversal. Since the market is in its fifth wave, buying plain call options is becoming riskier. A better approach for limited upside is using bull call spreads, which cap both profits and risks. This strategy allows for participation in any final surge toward new highs while guarding against a sudden drop.

Critical Levels To Watch

The key level to monitor is the pivot at 6788.87, marking the low of the second wave. If this level falls, it would invalidate the immediate bullish structure and suggest a larger correction has begun. Considering out-of-the-money puts with expiry in late March or April is a cost-effective way to prepare for this possible reversal. This technical pattern is forming amid stubborn inflation. The January 2026 Consumer Price Index (CPI) report showed core inflation at 3.1%, failing to drop below the crucial 3% mark that the market had expected. This persistent inflation reduces the likelihood of further rate cuts by the Federal Reserve, removing a key driver for stock gains. Historically, when major Elliott Wave patterns complete, volatility often spikes. The VIX index hit a low of around 12 just last month, a level that has often predicted market pullbacks, such as the one in the second quarter of 2025. Buying VIX call options may be a wise hedge against the current market complacency. For those with existing long positions, now is a great time to secure profits. Selling covered calls on long stock holdings can generate income and provide some downside protection. Alternatively, purchasing protective puts can serve as insurance, locking in the significant gains made since the lows of November 2025. Create your live VT Markets account and start trading now.

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