Reliance Industries Ltd (RIL) broke down from its consolidation pattern - a potentially bearish move for the stock.

The stock has been in a consolidation pattern since May 2009 making lower highs and higher lows effectively forming a symmetrical triangle. A symmetrical triangle is essentially prices coiling into a spring, waiting for an eventual breakout. A look at the chart nearby clearly shows the triangle marked by blue lines. Traditional technical analysis states the stock will pick a direction once it breaks the consolidation pattern.

The RIL chart shows a break of the triangle to the down side indicating that prices will fall. Traders short the stock once it breaks below the triangle waiting for prices to make the measured move. The measured move provides the profit target.

In the case of the symmetrical triangle the measure move is calculated by measuring the distance between widest area of the triangle, which in the case of RIL is about Rs 395. The measured move is shown by two black vertical lines. To arrive at the downside profit target 395 is deducted from the point where RIL broke the triangle. This brings the profit target on the short side to around Rs 590, shown by lower the blue horizontal line.

Most conservative traders book profits early at 75% of the measured move, which in the case of RIL works out to a profit target of Rs 705, shown by the upper horizontal line. Prices closed last Friday at Rs 988 giving a potential profit of Rs 283 for conservative traders and a run of Rs 398 for aggressive players.

Caveats

Chart patterns are likely to fail and a failed chart pattern can result in price moving strongly in the opposite direction or stay flat. Earlier this year State Bank of India had a chart pattern similar to RIL and its prices broke down. The pattern however failed taking SBI to new highs.

Additionally for prices to reach the conservative and aggressive profit targets, it has to clear two support areas in the area of Rs 905 and Rs 835. These support areas can be used as targets to book partial profits.

(The writer based in Chicago is editor of www.capturetrends.com)