The S&P 500 (SPX) is moving towards completing a diagonal Elliott Wave structure, which began at the low of 21 November 2025. Wave ((i)) transitioned higher, ending at 6986.33, then wave ((ii)) formed a clear zigzag pattern. Wave (a) dropped to 6885.74, wave (b) recovered to 6979.34, and wave (c) further declined to 6788.87, completing wave ((ii)) at a higher degree.
Following the correction, the Index resumed upward in wave ((iii)), reaching 7002.28, before a pullback in wave ((iv)) concluded at 6870.8. The pattern has since entered wave ((v)), advancing with internal subdivisions that show an impulsive pattern. From the wave ((iv)) low, wave (i) reached 6971.09, and wave (ii) retraced to 6893.48.
Bullish Outlook Remains
The bullish outlook remains in place while the 6788.87 pivot holds. With this level protected, any pullback is expected to attract buyers within a three‑ or seven‑swing sequence. This trend supports the potential for further upward movement as the diagonal pattern develops. The overall formation suggests the Index has scope for additional strength in the near term.
We see the S&P 500 grinding higher, nearing the end of a diagonal pattern that started late last year. This structure suggests the current upward trend is losing momentum and may be in its final stage. For traders, this is a signal to become more cautious about upside potential and start preparing for a potential reversal.
Given the market is in its fifth wave, continuing to buy outright call options is becoming riskier. A better strategy for limited upside would be using bull call spreads, which cap both your profit and your risk. This allows for participation in any final push toward new highs while protecting you from a sudden downturn.
Critical Levels To Watch
The critical level to watch is the pivot at 6788.87, which marks the low of the second wave. A break below this level would invalidate the immediate bullish structure and signal a larger correction has begun. We should consider purchasing out-of-the-money puts dated for late March or April as a cheap way to position for this potential reversal.
This technical pattern is forming against a backdrop of stubborn inflation. The January 2026 CPI report released last week showed core inflation holding at 3.1%, failing to break below the key 3% level that the market was anticipating. This persistence in inflation makes the Federal Reserve less likely to signal further rate cuts, removing a key catalyst for stocks.
Historically, the completion of major Elliott Wave patterns has led to a sharp increase in volatility. We saw the VIX index bottom out around 12 just last month, a level that has historically preceded market pullbacks, like the one we experienced in the second quarter of 2025. Buying VIX call options could be a prudent hedge against the complacency we are currently seeing in the market.
For those with existing long positions, this is an ideal time to protect profits. We could consider selling covered calls against long stock holdings to generate income and provide a small buffer to the downside. Alternatively, purchasing protective puts can act as insurance, locking in the significant gains made since the November 2025 lows.
