Trade Setup for Dec 31: Is the Nifty likely to fall to 23,300 in January?

As the Nifty continues to show strength, trading volumes have been low, and key resistance levels have emerged as barriers for the index. Ahead of the final trading day of the year, the Nifty is up 8.7%, marking a ninth consecutive year of positive returns. However, recent intraday movements suggest potential volatility as we move into January.

On Monday, the Nifty attempted a recovery, aided by banking stocks that helped push the index past 23,900. However, once the index entered the congestion zone between 23,900 and 24,000, it reversed sharply. The index not only dropped from the day's highs but saw a significant pullback, losing 270 points. Major contributors to the downside included HDFC Bank, ICICI Bank, Reliance Industries, M&M, SBI, Infosys, and TCS.

In contrast, the pharmaceutical sector showed resilience, with select IT stocks also recovering, particularly mid-cap IT names like Persistent Systems, Coforge, and Mphasis. The Adani Group stocks, notably Adani Enterprises, saw a strong uptick, while Adani Wilmar closed lower.

Despite the decline, volumes remain low as the year wraps up. The true test for the market will come next week when participation increases.

Looking ahead, the Nifty has closed just below its immediate support at 23,700. Call writing at 23,900 and 24,100 strikes had already indicated strong resistance, making it difficult for the index to breach these levels. The crucial 200-Day Exponential Moving Average at 23,700 has been violated, and the unfilled gap from December 19 is considered a bearish signal, typically marking the start of a downtrend.

Market Outlook:

Support Levels: Analysts are eyeing support between 23,500 and 23,400 for the Nifty, with immediate resistance at 23,800. The 23,600-23,500 range is seen as crucial, where buying interest might emerge. However, the 23,800-23,850 zone remains a key barrier, and a decisive break above these levels is needed for a sustained uptrend.

Downside Potential: According to Jay Thakkar of ICICI Securities, there is a possibility of the Nifty testing levels of 23,300 in the January series, especially if the index fails to break through the 23,800-23,900 resistance zone. Volatility is expected to increase, with important events lined up for the month.

Nifty Bank: The Nifty Bank index has been a significant drag on the overall market, dropping over 1,000 points from the day's highs. It has failed to sustain above the 52,000 mark since mid-December, making it a critical resistance level. The 50,600 level is now a key support for the banking index, with consolidation expected in the 50,500-52,000 range unless a breakout occurs.

The market outlook for the start of the new year is uncertain, with resistance at higher levels and potential support zones indicating a possible downside in the near term. Traders should remain cautious and watch for a decisive break above or below key levels.