Reliance and The Three Bears

Tuesday, 1 Jul 2008 | 12:56 AM ET

We've received lots of feedback from readers over the past few months. We love reading your emails so the keep them coming! We've also had many specific requests to chart various markets and companies. High on the list is India's Reliance Industries (IN:REL). So by popular request, Charting Asia presents the tale of Reliance and The Three Bears.

The Reliance story starts with a pile driver pattern created in January. This is the first little bear. The pattern develops when the market plunges and sets a new spike low. This low tests the foundations of the market and provides a target level of support for subsequent falls. Traders with long positions use the rebound after the pile driver pattern to sell and protect profits. Traders looking for short positions use the rebound as an entry point for a short trade.

The January pile driver support was tested in March and provided a strong rebound point for the April rally. The rebound from this level in May suggested this was a good support level.

The second bear is larger than the first. The failure of support at the pile driver level of 2,100 shows significant support weakness and confirms developing bear market strength. The growing strength of the bear is confirmed with the Guppy Multiple Moving Averages (GMMA) relationships. The most recent rally was met with consistent investor selling. The long term group of moving averages did not compress as the market rallied to 2,250. This suggests investors were continuing to sell. The degree of separation between the two groups of moving averages also remains consistent. This confirms developing bear strength.

The third bear is lurking in the long term support band between 1,660 and 1,800. The exceptionally optimistic see 1,950 as the next support level but this is not verified with chart analysis. The 1,950 level is the August 2007 rally peak. The subsequent retreat and rebound behavior encountered no resistance as it passed above 1,950. This suggests the level has low significance in terms of a resistance or support level.

In contrast the 1,800 level provided several resistance points in 2007 and also acted as a support level. This behavior increases the probability it will act in the same way in 2008. The lower level of this band at 1,660 provided consistent support in June and September 2007. These features create a support band where the third bear lurks.

Trading bands, or consolidation bands are a useful feature in a declining market. A single support level is easily violated with falling momentum. A consolidation band slows momentum and this makes it easier to develop a trend rebound or reversal features. These features include long-term patterns such as rounding bottoms, double bottoms and cup and handle breakouts.

Reliance remains a bear story. The GMMA relationships confirm downtrend pressure. The failure of support near 2,100 adds to bearish pressure. The big bear lurks in the trading band between 1,660 and 1,800. Failure of this as a support band sets an exceptionally lower downside target. The minimum target is near 1,350 with a potential to dip to 1,200.

Reliance is usually equated with reliable. In this market the chart analysis shows a reliable bear story with a initial downside target near 1,660.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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