Navigating Year-End Trends: Market Assessment Amidst Overbought Conditions

As we approach the end of the year, the financial landscape is marked by intricate dynamics and lingering overbought conditions. Last week commenced with significant overbought situations, and Wednesday's market downturn has spurred contemplation about the sustainability of the remarkable uptrend.

In the current scenario, the auto and realty sectors, which led the market earlier, seem to be showing signs of a slowdown. However, indications suggest that these sectors might not have exhausted their potential entirely. On the flip side, previously lagging sectors such as IT and pharma are making a comeback. Notably, the metal index, with the lowest year-to-date gains of 13.82%, contrasts with the standout performance of FMCG, which has recorded a robust 24.74% growth this year.

Reflecting on the past two years, the market typically entered the last week of the year with a lower baseline compared to early December or late November. However, this year, we lack that lower starting point, being in close proximity to record highs. Despite Wednesday's sharp declines, the market remains burdened by overbought conditions, potentially dampening hopes for a traditional year-end Santa rally.

While last week began with heavy overbought conditions, Wednesday's market correction seemed to embolden the bulls and restore risk appetite, recovering much of the losses incurred. Friday's market performance further deterred bearish sentiments, providing a positive frame for Nifty as we enter the final week of the year. However, the shortened trading week may introduce some caution, potentially limiting upside attempts as the week unfolds.

Taking a cautious stance, if Nifty manages to hold above 21,230, we can anticipate upsides targeting 21,540, although significant gains beyond that level seem unlikely. On the other hand, a breach below 21,230 could pose a threat to the 14-day exponential moving average (ema) at 20,998 or initiate a descent towards the gap below 20,500.

Despite the prevailing caution, a complete collapse is deemed less probable this week, aligning with our positive views on potential market upsides. Shifting focus to Bank Nifty, it appears less bullish than anticipated at the start of the previous week. The favored outlook suggests a temporary withdrawal of buyers, possibly until the 46,600-46,400 region, before allowing bulls to regroup and resume an upward trajectory, targeting 48,900. Echoing sentiments shared with Nifty, expectations of a substantial collapse remain limited.

As the year draws to a close, market participants are treading cautiously, evaluating the intricate balance of sector performances and navigating uncertainties associated with overbought conditions.