The SP500 (SPX) appears to be advancing in the 3rd of a 3rd wave for a final 5th wave. Previously anticipated impulse patterns now show potential for an overlapping ending diagonal (ED), affecting the lower endpoint of the target zone (~7345). The index unexpectedly dropped from its peak of 6986 to 6789, breaking past the 4th warning level and thereby invalidating the immediate 3rd of the 3rd-wave scenario.
The index is now showing signs of forming a larger ending diagonal with a 3-3-3-3-3 pattern. The December-January rally’s W-a was between 0.618 and 0.764 times the prior higher-degree rally, which fits expected ratios. If the index can remain above December and November lows, especially last week’s low of 6789, the W-c of the 3rd wave could initiate.
Target Levels And Divergence
The 3rd wave typically targets a 123.6-138.2% extension of the 1st wave, anticipated now between 7185-7235, aligning with the 161.8% extension at 7218. Currently, there is no divergence between the Advancing/Declining line and price, which makes a bearish outlook difficult despite an emerging ending diagonal. Upon completion of this pattern, a multi-month correction to approximately 5800 +/- 300 is expected before aiming for 8100+.
The recent, unexpected drop in the S&P 500 from its January 12 high of 6986 has changed our immediate outlook. We now believe the market is forming a more complex, overlapping rally known as an ending diagonal. This pattern suggests the final push higher will be choppy rather than a straight advance.
This view is supported by the CBOE Volatility Index (VIX), which has remained relatively low, hovering around 15, even during last week’s sell-off to 6789. The market is not showing signs of widespread panic, which aligns with the idea of a temporary detour instead of a major trend reversal. The dip followed a stronger-than-expected inflation report from early January 2026, which briefly tempered expectations of a more dovish Federal Reserve.
For the coming weeks, we must watch key price levels to manage risk. A break below last week’s low of 6789 would be a serious warning to reduce bullish exposure. The more critical support levels to hold are the December 2025 low of 6720 and, ultimately, the November 2025 low of 6521.
Market Participation And Correction Preparedness
A decisive move back above 6986 would confirm the next leg up is underway, presenting an opportunity for bullish derivative plays. Upon such a break, we would anticipate a rally toward the 7185-7235 target zone. Historically, the final stages of a rally, such as the one seen in late 1999, can be volatile and difficult to navigate.
Crucially, broad market participation continues to support the uptrend for now. The cumulative NYSE Advance/Decline line is still tracking the index and is not showing the negative divergence that often precedes major market tops. Without this internal weakness, it is difficult to justify taking an aggressively bearish stance just yet.
However, an ending diagonal is a terminal pattern, meaning this rally is likely on its last legs. As the index pushes toward our 7200 target, we should prepare for a significant multi-month correction down to the 5800 area. Prudent traders may begin planning for this by considering longer-dated protective puts or VIX call options as we approach new highs.
