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With air travel picking up, is now the right time to buy Rolls-Royce shares?

With the Rolls-Royce share price having dropped by over 45% from its 150 pence November 2021 high, is now the right time to buy the company’s shares?

Fundamental analysts may believe that with many countries in the world having re-opened and air travel gradually getting back to pre-Covid-19 pandemic levels, the the Rolls-Royce share price is undervalued and worth buying from a long-term perspective.

From a purely technical point of view the aircraft engine maker’s share price remains in a long-term downtrend and simply because it trades close to its pandemic lows at 65p, this is not reason enough to buy it, despite its over 90% decline from its 2018 peak at 1,058p and 45% drop in the past six months alone.

This week the share briefly slid through and is now grappling with the 87p to 84p support zone which incorporates the January and July 2021 lows as well as the March 2022 trough.

It wouldn’t be surprising if the share were to slip through this support area and drop back towards the October and November 2020 lows at 68p to 65p.

There are three reasons for this:

  • the first being that this support zone has already been, even if only briefly, slipped through this week, making it more fragile and prone to soon giving way;
  • the second being that the impetus very much remains on the downside, since the stock has been trading in a clearly defined downtrend channel since the end of last year;
  • and lastly that every time the share price rises by a large percentage in one day, this if followed by a sell-off as can be seen on the daily chart on the 27 September and 24 March (see single red arrows), whereas every time a sharp one-day sell-off has occurred, as happened on the 26 November and 24 February (see double red arrows), this has been followed by a decline, showing us that the bears remain firmly in control.

The odds are thus stacked in favour of the bears, and only a rise and daily chart close above the 21 April high and the 55-day simple moving average (SMA) at 97p to 99p would lead to the current bearish outlook having to be re-evaluated.

For the bulls to be back in charge, a rise and daily chart close above the September low and downtrend channel resistance line at 103p to 104p would need to be seen. Only then would the 200-day SMA and February high at 116p to 122p be back in the frame.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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