Current Market Phase
The Dow Futures (YM) has recently completed a five-wave diagonal from the November 21, 2025 low, marking wave 1. From that point, wave ((i)) advanced to 49,299, followed by a corrective wave ((ii)) down to 48,092. The impulse wave ((iii)) saw a rise, with wave (i) reaching 48,686 and wave (ii) pulling back to 48,556. This was followed by a climb in wave (iii) to 49,463, a modest wave (iv) pullback to 49,096, and the final push in wave (v) to 49,899, completing wave ((iii)).
The index then corrected in wave ((iv)) down to 49,001 before advancing in wave ((v)) to 49,899, finalising wave 1. Currently, the Dow Futures is retracing in wave 2, unfolding as a zigzag pattern from the wave 1 peak. Wave (i) fell to 49,057, wave (ii) rose to 49,799, and wave (iii) dropped to 48,689. Currently, wave (iv) has rebounded to 49,095. The market is anticipated to complete wave (v) of ((a)) soon. Following this, a corrective rally in wave ((b)) should address the cycle from the January 13, 2026 high, before the index resumes its downward trend, maintaining the broader corrective phase.
The strong rally we saw from the low on November 21, 2025, appears to have run its course, completing a five-wave cycle. The market is now entering a corrective phase, meaning the recent upward momentum has paused. This shift suggests that strategies built on continuous new highs are no longer appropriate.
This pullback aligns with recent economic data, as the latest CPI report for December 2025 showed a slight uptick in inflation to 3.1%, surprising those who expected the cooling trend to continue. We also saw the VIX, a measure of market fear, climb from its late 2025 lows below 15 to now hover near 20. This indicates growing uncertainty among investors after the sharp advance.
Based on the current structure, we expect a brief rally, or a “bull trap,” in the coming days. Derivative traders could view this temporary upswing as an opportunity to establish bearish positions at more favorable prices. This might involve selling call spreads or preparing to buy puts as the market nears resistance levels from the bounce.
Strategy and Outlook
Looking back, this pattern is not unusual after a strong, multi-month rally, as we observed similar healthy pullbacks during 2023. These periods of consolidation are necessary before a larger trend can resume. Therefore, the immediate focus should be on managing risk for further downside.
Once the corrective rally is complete, the market is projected to head lower again to complete the broader downward correction. This suggests that traders should look for signs of the rally’s exhaustion to initiate positions that would profit from a decline. The primary trade over the next few weeks will be to capitalize on this expected second leg down.
