Anil Manghnani of Modern Shares & Stock Brokers said the situation could get worse for the markets if 3,500 Nifty and 11,800 Sensex are broken. "I would like to see the market settle down in the range of 3,500-3,700 Nifty and maybe 11,800-12,400 Sensex."  

He sees this volatility easing off in another month or two at least. He does not think the US problem will settle just because the bailout plan has been passed.

Manghnani feels any rally in this market would be led by public sector banks. “We are positive on Kotak. In the private banking sector,ICICI Bank is the only worrying one that continues to make new lows whereas the other three   HDFC Bank, Axis Bank, and Kotak are not cracking as fast as the former. So, probably they are still the three safe banks to trade in. I think Rs 490-550 would be the broad range to accumulate Kotak in this fall with a target of Rs 618. In a bigger move, I would buy if there is a sharp bounce to about Rs 708, with a stop loss below Rs 485.”

Neppolian Pillai of Modern Shares & Stock Brokers is bullish on Sesa Goa, IVRCL Infrastructure, and Rolta India. "I would like to buy Sesa Goa in the fall whenever that happens. Sesa Goa is currently trading at about Rs 117 per share or so. I will start looking at the stock from Rs 90-110 per share for a target of roughly about Rs 129-132 per share. I would place a stop loss at about Rs 85. IVRCL Infrastructure is trading close to its major 50-month average at the current price of about Rs 238. The second cluster of average will then give it support at about Rs 210. So, around Rs 210-238, I would buy for a target of Rs 283-295, with a stop loss at Rs 208. From the IT space, our pick for this current month will be Rolta India at around Rs 190-230. This is the range at which I would like to buy Rolta with a target of Rs 267-279 and a stop loss at about Rs 185."

He is bearish on the realty space and sees more pain and downtrend in that sector.

Here is a verbatim transcript of the exclusive interview with Anil Manghnani and Neppolian Pillai on CNBC-TV18. Also watch the accompanying video.

Q: What will be your eventual worst-case targets for the market because some of your peers have already started talking about 3,200 Nifty and maybe 10,000-10,500 Sensex? Do you see those levels at all on the charts by the time this bear market is out?

Manghnani: I see 3,700 to 3,500 on the Nifty and about 12,400-11,800 on the Sensex and there is a very valid reason for that. Every market that has broken below the 50-month exponential or simple moving average has broken after that. A classic scenario would be the Dow. Once it broke about 11,600-11,800 which it held in January, it went to 10,800 and tried to bounce back.

Every market that has broken below the 50-month moving average has struggled to come back above that average and then has continuously slid and made newer lows. It is happening to the CAC, the DAX, the FTSE, the Straits Times, the Hang Seng, the S&P 500, and the Nasdaq. The only two or three markets that I have seen it being held up is India, Mexico, and Brazil.

That’s why I still hope the structural bull market is maintained as long as the 50-month moving average is not broken, which is currently placed at 3,500-3,700 on the Nifty and about 11,800-12,400 on the Sensex. If these levels are broken, then I will not even bother to give you targets on the downside because for me then the structural bull market in India would be over. There is no point of talking 10,000-10,500 or 10,600-10,800 or whatever. The markets would then take many months to recover.

The reason I say that is because I see that happening in the Dow. Despite the ban on short selling and the government intervention, these markets are not bouncing up mainly because the 50-month moving average has broken down. For me that’s very crucial. The NIfty and Sensex have to hold 3,500 and 11,800 respectively in any fall. If that is broken, I will not put out any target on the markets because at the end the market doesn’t have the capacity to pullback in any sort of way.

So, those are crucial levels going forward? Whether this month, next month or in this entire collapse wherever the market settles down, these major levels have to hold or the times would get even a lot more troubling. It is bad enough that we are down 40-42% on the indices but it could get worse if these two levels, 3,500 and 11,800, are broken. I would still keep the faith and buy in the range of 3,700-3,500 with the view that if it breaks 3,500 that will be my stop loss across the board.

Q: It has been quite turbulent but it appears that we have shifted into a lower trading range. What’s the sense you are getting for October for the Nifty?

Manghnani: The difficult part for both the traders and investors in any bear market or bear phase is when the markets are trying to find a bottom. They hope the market spends some time there and gives them an opportunity to pick stocks or actually see what’s happening at lower level. But that’s not the case; we get 1,000-point swings on the Sensex in a few hours every time we reach the 12,500 or sub-12,500 making it equally difficult for both traders and investors.

The classical thing that technical analysts like to do is every time there is a scenario like a bear phase we are in, they compare it to what happened in 2000 or 1992. But there is a clear difference in what’s happening now. In percentages terms, we are moving to what happened in those two-years. But the speed at which things are happening is quite different this time. Everything is happening at a rapid pace. Whereas in the last two occasions of 2000 and 1992, it was a slow drift down, where the markets consolidated at lower levels, made a base, and then had a fantastic rally.

I still hope we spend some time at the lower end, not just have these v-shaped recoveries and eventually play out after the dust settles in the US and things steady globally.

I know it sounds great in the morning to see the Dow down 800 and Indian markets having bounced back into a positive territory. People like to call it a double or a triple bottom but that actually is damaging sentiment or damaging the structure even more. V-shaped recoveries that happened in the last two or three times did not do us any good. In fact, it is a false sense of security. People come back to buy again after having sold lower. The market then goes and retests 3,800 or in this case breaks it.

It is nice to say that the market is not breaking below 3,800 but if you compare stocks at each time the market has touched 3,800, stocks are 10-20% lower than when they were on previous occasions. So, neither the Nifty nor Sensex has broken their support levels significantly, but stocks are making newer lows and portfolios are getting eroded quite sharply. I think the damage is quite significant this time.

I would like to see the market settle down in maybe the range of 3,500 to 3,700 and maybe 11,800 to 12,400on the Sensex.

Q: The other point you were making about these wild swings. We track the VIX (Volatility Index) and that has been effortlessly spiking beyond 40 reaching 45, do you think this volatility is easing off for markets as well in the near future?

Manghnani: Probably some more time, it might last another month or two at least. I don’t think the US problem will settle just because the bailout plan is passed. George Soros once clearly put it, saying government intervention in a capitalist market only prolongs and probably worsens the situation in the long run. So, what is happening in the US is going to take some time. Even if one follows the Chicago Board Options Exchange, or CBOE, the chart never goes past 35-38, but now it doesn’t seem want to come below 35-38. So as times are changing; you see gold moving to USD 100 per ounce in a day or oil short squeeze USD 25-30 per barrel and then collapsing. These sharp moves are happening across all asset classes, and that maybe the order of the day till the dust settles. So, that might take another month or two to settle down.

Q: The metal space, was in big trouble in September. Do you see any respite in October and would you put out a contrarian buy in any of the stocks which have got beaten up?

Pillai: Not really. The sector chart is currently tracing very close to the long-term support line, whereas the comparative chart from which we take a clue ‑ metal has gone down the six-year trendline ‑ has broken through that eight-year trendline and is going to come and support it some time later. So, probably stocks would probably give you a trading bounce but not an investment kind of situation. You can surely trade.

I would like to buy Sesa Goa in the fall whenever that happens. Sesa Goa is currently trading at about Rs 117 per share or so. I will start looking at the stock from Rs 90-110 per share for a target of roughly about Rs 129-132 per share. I would place a stop loss at about Rs 85. That would be the trading pick. 

Q: A while back we were discussing plays like JP Associates which have got beaten up quite a bit, what is the whole sector telling you now and would you pick anything from there?

Pillai: Not really. I might look at an IVRCL Infrastructure because that stock is trading close to its major 50-month average at a current price of about Rs 238. The second cluster of average will then give it support at about Rs 210. So, around Rs 210-238, I would buy for a target of Rs 283-295, with a stop loss at Rs 208.

Most other stocks be it Unitech and other realty stocks are looking absolutely battered. They have completely oversold and because of that will get a bounce back but it would not be a bounce back which one can bet on at a higher level. So, there is some more pain and more downtrend left in the sector.

Q: Is IT settling down at all and anything that looks strong there?

Pillai: Most IT stocks are hitting major lows in the past few days. But the sector is going to lose some more steam. What I have noted is not going past the previous lows when it is reaching up because it broke the previous lows twice on the comparative chart. Now, in this month it needs to go above that low to really tell us it is going to go into a huge buy. That will be a contrarian buy sector for us, because most stocks are at their major levels. So, even though the comparative chart is not going into a buy as of now, I would like to look into stocks at a lower level to buy.

Our pick for this current month will be Rolta India around Rs 190-230. This month we are giving a larger range purely because the market is in a flux. The volatility is too much that we are ourselves buying in a bigger range. So, Rs 190-230 is the range at which I would like to buy Rolta with a target of Rs 267-279 and a stop loss at about Rs 185.

Q: The trading eye has generally been more on public sector banking stocks, but you like Kotak Mahindra?

Manghnani: Yes. There is a 20% limit that FIIs can buy in PSU banks, that’s why there is no major damage. They are trying to exit everything. Any rally in this market will be led by the PSU banks, but since they haven’t corrected maybe the upside seems to be limited at least from the trading point of view for this month.

We are positive on Kotak. In the private banking sector, ICICI Bank is the only worrying one that continues to make new lows whereas the other three ‑ HDFC Bank, Axis Bank, and Kotak ‑ are not cracking as fast as the former. So, probably they are still the three safe banks to trade in.

I think Rs 490-550 would be the broad range to accumulate Kotak in this fall with a target of Rs 618. In a bigger move, I would buy if there is a sharp bounce to about Rs 708, with a stop loss below Rs 485.