The Rolls-Royce share price declined on Friday as investors continued to assess the strength of the company as the Delta variant spreads. The RR shares ended the week at 111.70p, which was substantially lower than last week’s high of 120p.
Rolls Royce faces significant hurdles
The Rolls-Royce share price has had a spectacular rally in the past few weeks. This rally has seen the shares move from less than 90p in July to more than 120p. As a result, it has become one of the best performing shares in the FTSE 100 index.
This growth was mostly because of the ongoing vaccination drive and the fact that the company published strong half year results. The results showed that the firm managed to turn its first profit since the pandemic started in 2020.
The strong performance was mostly because of the ongoing vaccination drive in key countries. Many countries like the UK and the US have already vaccinated most of their populations. At the same time, many airlines like IAG, Delta, and United have all expressed optimism about the recovery process.
Still, Rolls-Royce faces significant risks. The biggest risk is that the number of Covid cases is rising across the world. This jump is mostly because of the new Delta variant. Worse, some key countries like Australia and New Zealand that had been relatively unaffected have seen a surge in cases. Therefore, there is a likelihood that many long-haul flights will take more time to recover.
RR is also under an activist attack. Causeway, one of the biggest shareholders, has called for the company to split its business. Its proposal is for the company to sell its power business and focus on becoming aviation and military contractor. Still, some analysts see this as a bad strategy. In a note, an analyst at The Guardian wrote that the temptation to sell the power business to pay debt should be obvious but it should be resisted. She added:
“Diesel generators are a mucky business that will be on its way out relatively soon, but other technologies such as fuel cells, hybrid power systems, and micro electricity grids using various fuels could all play a part in the future of the global economy.”
Rolls-Royce share price forecast
The four-hour chart shows that the RR share price has been in a strong bullish trend in the past few weeks. Along the way, the stock managed to move above the key resistance at 113.35p, which was the highest point in June. Still, last week, the shares declined below this support. It also moved below the 25-day and 50-day exponential moving averages (EMA).
The stock seems to be forming a head and shoulders pattern, which is usually a bearish sign. Therefore, there is a likelihood that the stock will keep falling as bears target the 50% retracement level at 103p. This view will be confirmed if the price moves below the 38.2% retracement at 107p. This is about a 7.35% decline from the present level.
However, the stock may be doing a break and retest pattern. As such, we can’t rule out a situation where a bullish trend resumes.