Market to correct by 50% after 100 pts upmove: Manghnani

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Anil Manghnani of Modern Shares and Stock Brokers tells CNBC-TV18 that the market will find a top within the next 100 points, after which a 50% correction is on the cards. "The 50 day average for most stocks is still well below the 200 day average, so I would say they are ready or ripe for a correction," he explained.

He further adds that the market's current moves are very similar to its movement during the 1992-1996 period. "Strictly studying the '96 theory, I believe that the market will do well in the first six months of the year and then collapse by the time you reach Diwali or November," he said. This theory is completely opposite to the view on the street, which is the market will pick up towards the second half of the year.

"So the Nifty will fall to 4,950-5,000 from its rally to 5,700, and then by the end of the year collapse to 4,300," he added.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: It's been a relentless run up to 5,270. Would you bet against the market or do you think the trend has changed?

A: I think after long time, almost 15-16 months, we have had that channel just about closed above yesterday, so it will be interesting to see what it does over the next two days. Yes there was a little bit of volatility yesterday, but you need to see more of it to actually call a top.

My gut feeling is this market is playing out very similarly to what happened between '92 and '96. We had two tops in '92-94 and then a collapse in '95. We have had this similar situation in 2008 and 2010 with the tops and 2011 was a complete down; you started the year at high and closed at the low. Interestingly, if you go back to '96 February, you had a sharp move which is very similar to what we had in January this year, and then about 50% correction. So if I equate similarities between '96 and today, I would say the Nifty will give you at least a 50% correction of the recent moves somewhere between 5,300 and 5,400.

So 4,500 right up to 5,400 is a 900 point move, so about 450 point correction is on the cards, so somewhere back to 5,049-5,050. But having said that, most of the stocks in the index and midcaps are now little stretched; they have all reached at 200 day moving averages. Since the 50 day in most cases are still well below the 200 day, then I would say they are ready or ripe for a correction. So look out for a top somewhere in the next 100 points on the Nifty and then expect at least a 50% correction of the recent move both in the index and across stocks.

Q: But a 50% fall, whenever it comes, would still not take you back anywhere close to 4,500-4,600 base. Would you say those dangerous possibilities are over?

A: If I stick to my theory of '92 to '96, then what it tells me is something different to what most of us had expected before this rally. I think the general consensus in the market was the first six months would be sideways to lower and then the market would pickup in the second half of the year. But if you are strictly studying the '96 theory, you would actually believe the total opposite, where the market does well in the first six months of the year and then collapses by the time you reach Diwali or November.

So if you are strictly equating to what happened in '96, what you are saying is that the market will go back to 4,950-5,000 from their rally closer to 5,700 and then by the end of the year collapse to 4,300. It's a wild theory, but it's something I am willing to at least track for the next couple of months to see how it plays out.

Q: Where would you be prepared to go and take shorts on IDFC?

A: It hit a major target at Rs 138. If you look at the candle yesterday, that's what we call a bearish engulfing pattern where it's completely negated the previous days' bull move. So Rs 132 to Rs 138 again is a short maybe stop of Rs 140 and then expects a correction back to about Rs 121-115 levels.

Q: You are getting bearish on the Bank Nifty which has had a very good run?

A: From 7,700 odd it's all the way up to 10,000, but I think it will get lot of resistance 10,000-10,100. If you see the last two-three days, this crazy doji suggests volatility and confusion. If you look at some of the names in the Bank Nifty like SBI, Axis and ICICI, they are all at major 200 day averages and so is the Bank Nifty. So since it's rallied so much, it needs to do a pullback now with the rest of the market. Even if the market were to stretch to 5,400, it may stretch to 10,100-10,200 and then you need to see a correction. So I have only said 9,500 as the low but I think it would eventually even break below that.

Q: What is the sense you are getting on the rupee? It started at 49.30 this morning; do you see it slicing through the 49 level as well?

A: I think the dollar has lot of support between 49 and 48. When you see sharp moves up, the next move is always on the downside and it is quite sharp, so no surprise to see the move from 54 to 49. But between 49 and 48 the dollar will steady and I am expecting that eventually second half of the year when the market does correct, if I am working on my '96 theory, then the rupee should go back to 52 even 54 levels in the second half.

So maybe it will steady between 49 and 48 and then you will have a gradual move up to 52-53. So if you are playing the rupee then 49-48 is where you start cutting and getting back into dollars.

Q: Do you think we will go up to another 100 odd points maybe in the next few days and within the February series you expect to see the correction that you are talking about?

A: Yes I will have to say so. If I am going by my '96 theory, that happens exactly the next month after the big move. I think if you look at what is happening globally, everybody is talking about the golden cross in the S&P. I am playing that that could be the hindrance for the market because the market is getting complacent now in the US. Everybody who was cautious and bearish and has been caught on the wrong side now is becoming excessively bullish. So I think that golden cross might fail.

If you look at the crude charts, it went from USD 75 to 101 per barrel and that's when the golden cross happened in crude somewhere in early December or maybe mid December. But after that golden cross has happened, crude just went to USD 103 per bbl and now it's come back to Rs 96. My target is somewhere around Rs 93 as a support. But the golden cross doesn't mean it just has to take out, it might go sideways for sometime before it moves up. I think because everybody is looking at that, it might not play out the way everybody expects it.

Remember you already have a market that has gone from 666 to 1,300, the high is hardly 1,500, so to expect a breakout is a little far fetched. So that correction which might surprise people in the US because everybody is bullish could help India also correcting that 50% which I am looking to.