Rolls-Royce share price has pulled back in the past few weeks, moving from the year-to-date high of 1,194p in September to the current 1,038p. It has moved into a correction after falling by over 13% from its highest point this year.
Rolls-Royce share price technical analysis explains the recent retreat
The Rolls-Royce stock price has pulled back in the past few weeks, mirroring the performance of other companies in the industry like GE Aerospace, which has also dropped by 10% from the year-to-date high. In France, Safran stock has also dropped from the year-to-date high of €315 to the current €290.
The decline is likely because investors are starting to sell their shares to book profits after a robust rally. In Rolls-Royce’s case, the stock was up by 1,643% from its lowest level in 2022 to its highest level this year.
The daily timeframe chart shows that the RR stock price retreated after forming a double-top pattern at 1,180p and a neckline at 1,086p. A double-top is one of the most popular bearish reversal patterns in technical analysis.
The stock also pulled back after forming a bearish divergence pattern on the daily chart. This pattern happens when oscillators like the Relative Strength Index (RSI) and the MACD are moving downwards and forming a series of lower lows when an asset is in an uptrend.
In this case, the RSI has dropped from the overbought level of 78 in June to the current 30. Similarly, the MACD indicator has moved below the zero line, a sign that the bearish momentum is continuing.
Therefore, the most likely scenario is where the stock continues falling as sellers target the key support level at 1,000p. It may then bounce back after that or continue with its downtrend as investors rotate to other stocks.
The bearish Rolls-Royce stock outlook will become invalid if it moves above the key resistance level at 1,086p, the neckline of the double-top pattern.
Rolls-Royce business is thriving
The ongoing Rolls-Royce stock pullback does not mean that the company is doing badly. In fact, its business is firing on all cylinders, helped by the booming aviation sector and shortage for widebody engines.
The most recent trading statement showed that the company’s business was doing well as it received large engine orders from companies like IndiGo and Malaysia Airlines. It also received orders from Emirates and Etihad in the recent Dubai Airshow.
The company’s other businesses are doing well, with investors focusing closely on its small modular business, which is seeing strong demand. The UK government has already selected it and is now in the final stage of competition in Sweden. It has also started the regulatory process in the United States.
If successful, this business may become as valuable as that of its American rivals like Oklo and NuScale, which have achieved valuations of over $13 billion and $5.5 billion, respectively.
The company’s power business is also thriving, helped by the surging data center demand. It is even building its next-generation engine, which will enter service in 2028.
Altogether, the management believes that the company will hit its forward guidance of underlying operating profit of between £3.1 billion and £3.2 billion, and its free cash flow of between £3 billion and £3.1 billion.
Most importantly, there are signs that the company is not all that overvalued despite the recent surge. It has a trailing PE ratio of 15, which is in line with other industrial companies.
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