Rolls-Royce share price has hit turbulence this month as the airline industry continues to face major challenges. It dropped to 1,160p, its lowest level since May 19, down by over 26% from its highest point this year. So, is it safe to buy the dip as Saudi Arabia reopens its airports?
Rolls-Royce Holdings Rebounds as Saudi Arabia Reopens Airport
RR stock continued its strong downward trend last week as GE Aerospace and Safran, its top competitors, published their earnings reports. These earnings showed that the industry continued doing well in the third quarter.
However, their shares dropped because of the weakness in the aftermarket. Safran dived to 271 euros, its lowest level since May this year and 25% below the year-to-date high. GE Aerospace plunged to $280 from the year-to-date high of $390. The two companies warned about weakness in the aftermarket industry.
Rolls-Royce is now attempting to bounce back after Saudi Arabia announced it was reopening its airport after the attacks by Houthis. This is a big move since Saudi is a big Rolls-Royce client. However, the risk is that Houthis may decide to attack the airport once again since the war is escalating.
The stock also bounced as crude oil prices cooled. Brent dropped from last Friday’s high of $117 to $114, while the West Texas Intermediate (WTI) fell to $101. These benchmarks fell as Trump ruled out striking Iran this week.
The risk, however, is that prices will likely bounce back this week as investors predict renewed attacks against Iran after the upcoming Israel and US elections. Higher oil prices will translate to higher jet fuel costs, which will affect its civil aviation business.
There have been concerns about Rolls-Royce’s valuation, which has become stretched in the past few months. It has a forward price-to-earnings ratio of 35, higher than other companies, including popular names like Nvidia and Micron.
Rolls-Royce Share Price Technical Analysis
Rolls-Royce chart | Source: TradingView
The daily chart shows that Rolls-Royce stock has slumped in the past few months, and the retreat intensified last week after the GE Aerospace earnings. It has now plunged below the 200-day Exponential Moving Average (EMA). It is also forming an inverted cup-and-handle pattern, a common continuation pattern in technical analysis.
The Average Directional Index (ADX) has jumped to 41, its highest level this year, and a sign that the downward momentum is accelerating. Therefore, the stock will likely have a dead-cat bounce, potentially to 1,200p and then resume the downward trend. A bearish breakout will see it drop to the key support level of 1,000p.
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