Reliance Industries Ltd. (RIL)

Reliance Industries Ltd. (RIL)

Reliance Industries has been forming a pennant pattern on the charts over the last few weeks.

What is a Pennant Pattern?

Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.

Pennants are really short-term triangles. They form with lower highs and higher lows, over one to five weeks. The line through the peaks and the line through the troughs converge and the pattern is completed by a break outside the converging lines.

In the formation of a Pennant, there are two trendlines to draw. The upper trendline, which is referred to as the supply line, represents resistance. The supply line represents a lack of conviction by the buyers to commit more funds to the market in a particular issue, and because of that, there is enough profit-taking and short selling to turn prices back down. The lower trendline is the demand line and represents support. In this situation, it is the buyers that come back to the party and drive the prices northward one more time.

Volume Confirmation

Volume normally expands at the start of the flag or pennant, contracts as the pattern develops and then expands on the breakout.

Target Measurement

In an up-trend, the targeted move is measured from the start point of the trend (the breakout point at the base of the trend or most recent congestion pattern) to the highest high recorded in the flag or pennant pattern. The move is then projected up from the point of breakout (from the flag or pennant pattern), to arrive at the target.

In a down-trend, the targeted move is measured from the start of the down-trend (the breakout point from the reversal or most recent congestion pattern). The distance is calculated to the lowest low recorded in the flag or pennant pattern and then projected down from the point of breakout (from the flag or pennant pattern).

How to trade Pennants

There are two schools of thought:

(A) The first school will enter a trade at the point of breakout and place a stop-loss one tick outside the opposite trendline.

In an up-trend, the trade is entered on a break above the upper flag or pennant line. The stop is placed just below the lower flag or pennant line, in line (vertically) with the point of breakout.

In a down-trend, the trade is entered on a break below the lower flag or pennant line, with a stop placed one tick above the upper flag or pennant line, opposite the breakout point.

(B) The second school will enter a trade before the breakout point, while the pattern is still forming. Their reasoning is that the patterns are normally reliable and early entry means lower risk, as the stop is closer to the entry point. This is only makes sense for pennants, not for flags where there is no technically reliable point to place a stop-loss.

For pennants, place a stop-loss just outside the trendline, in line (vertically) with the point of entry, on the opposite side to the expected breakout.

Example with Reliance Industries Ltd.

In the case of Reliance the resistant or supply level is at Rs. 460.00. A break above this level would mean that the current bearish trend has reversed and a new bullish trend has started. A break above the level of Rs. 460.00 would give us an initial target of Rs. 490.00 to 500.00.

A break below the support or demand level of Rs. 420.00 would mean that the bearish trend has resumed or continued and would give us a target level of Rs. 380.00 to 390.00.

I would suggest traders to wait for a confirmation which would be a breaking its support or resistant levels and going short or long accordingly.

To view the attached chart please click on the thumbnail below.

If you have any questions or comments please post them here.

Attached Images

RIL040617.gif (8.1 KB, 184 views)

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Traderji

www.Traderji.com

The BSE Sensex seems to be forming a pennant pattern too with 5000 as resistant and 4665 as support!

Will have to wait and watch which way the market moves.

Look for a sharp move either ways which would be a great trading opportunity.

Good write up Traderji!

Before this I never ever knew what a "pennant" ever was!!!

Now I will look for these patterns in the charts and hopefully they shd help me in my analysis.

Hi Traderji,

Good call on Reliance. It has broken 420.00 and is currently trading at 415.00.

I hope to book profits at 380.00 - 390.00

Keep up the good analysis.

ya, good call on reliance, traderji.

we all have to learn from you, specially the analyst in the media!!!

when will your next stock pick be released?

Thank you all for your comments!

Make sure to keep your stop loss at break even level or 420.00.

Please read this excellent write up on money management. It is very important that all traders adhere to certain money mangement rules in order survive in the markets.

You can look forward to my next pick soon.

Keep visiting this forum regularly and I would also like feedback from other readers as well.

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Traderji

www.Traderji.com

Penants taking the example of Reliance Industries has been explained pretty well. I was just wandering that in addition to explaining how the price objective is calculated, this measuring implication could also be shown precisely in a diagram. The thumbnail just shows the penant but if the following( and similar explanations) could be shown by drawing precisely:-

“In an up-trend, the trade is entered on a break above the upper flag or pennant line. The stop is placed just below the lower flag or pennant line, in line (vertically) with the point of breakout”

For beginners there will always be gaps in understanding. If it cannot be shown for some reason, I shall understand because I have not seen any measuring explanation shown clearly in any book so far.

I think there should be such good practical examples for each of the basic concepts-bar reversals, gaps, other continuation patterns etc.

Reliance Industries Ltd. (RIL) - The Calm Before The Storm

After breaking its Rs. 420.00 support level on 23rd June 2004, RIL bounced back to 447.25 (still below its Rs. 460.00 resistance level mentioned earlier).

During the last 3 trading sessions Reliance Industries Ltd. (RIL) has been forming a small pennant. What makes this pattern even more interesting is that the last bar is a narrow range bar and an inside day bar.

Narrow Range Bar
When the difference between the "High" and "Low" of a bar is the smallest among many bars (5 or more), that bar is called a Narrow Range Bar.

Inside Day Bar
When the "High" of a bar is less than the "High" of the previous bar and when the "Low" of the bar is greater than the "Low" of the previous bar, then the bar is called a Inside Day Bar.

The last bar of attached chart is both - a narrow range bar and an inside day bar.

Significance
The significance of the Narrow Range Bar and Inside Day Bar is that it represents a marked decline in price volatility.

Implication
Range expansion (huge price move) and an increase in price volatility tend to follow this pattern setup.

Trading Strategy
See attached chart
(You have to Log in after you successfully register yourself in order to view the attached chart)

Attached Images

ril040705.gif (30.5 KB, 53 views)

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Traderji

www.Traderji.com

what is your view now on reliance inds and the nifty.
can u chaeck the charts and reply.
naressh

You can view my latest comments and trading strategy on Reliance Industries at http://www.traderji.com/showpost.php?p=248&postcount=8
(please log in to see the attachment)

I will comment on the NSE Nifty when a suitable trading opportunity comes by.

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Traderji

www.Traderji.com