This is my take on the classic Air Speed Flap system for deploying a parachute on a water rocket.

You need to make a simple and small parachute. I made mine from the bottom of a light shopping bag. I chopped it off and ran 4 strings from it to a central string that attached first to the base then to the cone. You also need a lightly inflated balloon to act as a spring.

The air speed flap needs a bit of another bottle glued on to it. This needs to be about 80mm * 30mm in size.

The idea of this is that when the rocket launches, the air pushed the flap down. This unlatches the cone. Under normal conditions it will flip open, but as the rocket is travelling upwards, the air pressure against the nose holds it in place. When it slows down, the spring overcomes this pressure and the parachute can fall out.\

This video might help. http://youtu.be/r16PdFdaIAM

This is designed for a 1.25L bottle.

This design has the rocket fins: http://www.thingiverse.com/thing:294744