The Rolls-Royce share price has moved sideways this month as the recent surge faded. It dropped to a low of 1,067p on Tuesday, down from the year-to-date high of 1,110p. This article explores the top reasons why the stock may be on the cusp of a brief reversal.
Rolls-Royce share price technicals point to a brief reversal
The weekly chart shows that the Rolls-Royce stock price has been in a strong rally in the past few months. It has remained much higher than the 100 and 50-week Exponential Moving Averages (EMA), a sign that bulls are in control for now.
The 100-day EMA is at 905p, while the 50-week figure is at 990p. As such, there is a risk that the stock will go through a mean reversion, where it moves back to its historical average. A good example of this is what happened in April when it plunged to the two averages.
The other major risk is that the stock may undergo a mean reversion, a phenomenon that has already begun to occur. Mean reversion happens when an asset’s oscillator starts moving downwards as the price rises.
The chart below shows that the Relative Strength Index (RSI) has been moving downwards and is now nearing the neutral point at 5o. Also, the Percentage Price Oscillator (PPO), which is a unique form of the MACD indicator has started to point downwards.
Therefore, it is likely that the stock will have a slight pullback to at least 900p and then resume the uptrend. A move above the all-time high of 1,110p will invalidate the bearish view and point to more gains.
Rolls Royce Holdings has strong fundamentals
To be clear: the bearish Rolls-Royce stock price forecast is not a sign that the company has major issues. It is based on technicals, which have formed on the weekly and daily chart timeframes.
Rolls-Royce Holdings has strong fundamentals as demonstrated by its most recent financial results. Its revenue jumped by 13% in the year’s first half to £9 billion, while its gross profit jumped by 33% to £2.5 billion, helped by the management’s cost optimizations. Its operating profit soared by 50% to £1.7 billion, while the free cash flow rose to £1.58 billion.
These results demonstrated that Rolls-Royce’s business was doing well in terms of its top-line and bottom-line. Additionally, its balance sheet improved to £1.08 billion from a negative £822 million in the same period last year.
Rolls-Royce’s three businesses: civil aviation, power, and defence, are all having major tailwinds. Civil aviation is thriving as evidenced by the recent earnings by IAG, United, and Lufthansa.
The defence segment’s revenue rose by 1% to £2.2 billion, driven by the transport, helicopters, and combat. Also, the power systems division jumped by 20%, helped by the AI tailwinds.
The only major fundamental risk facing the Rolls-Royce stock price is that it is highly overvalued. It has a forward price-to-earnings multiple of 61, much higher than the sector median of 23.
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