Chart of the week: Rolls-Royce ripe to ‘buy low, sell high’
The aerospace company is set to enter a sharp rally phase, our columnist believes.
15th February 2021 11:39
by John Burford from interactive investor
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The aerospace company is set to enter a sharp rally phase, our columnist believes.
Rolls-Royce (LSE:RR.), the icon of the British aerospace industry, has certainly been through some rough times.
Its engine division has been clobbered by the global pandemic lockdowns curtailing air travel. Some say it will not return to its former glory days for years, if at all. Not only that, but jet-fuelled engines that the company produces now carry a certain stigma. But the company is not cowering in the corner waiting for the hangman to arrive. It is moving into other areas, but this will likely take years for any major payoff.
With bullish sentiment on the floor, can there be any hope for the shares as they plumb new depths? I believe that most of the bad news is out of the way and the shares trading under £1 offer an investment with excellent upside potential and low downside risk.
Here is the very long-term chart:
Source: interactive investor. Past performance is not a guide to future performance.
The all-time high of £13 made in January 2014 started a slide down to the current sub-£1 area in three clear waves – and to match the low levels last seen in 2003. This has created a probable double bottom.
To gather clues for a likely upside reversal, here is the weekly chart:
Source: interactive investor. Past performance is not a guide to future performance.
The latest wave down has a potentially complete five waves, but the stand-out feature is the huge momentum divergence at the low that also appears on the monthly chart.
That usually signifies the selling pressure is rapidly drying up and the buying forces are taking over. It is only a matter of time before they dominate and push the shares higher.
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Remember, my rule that states that in such circumstances with a huge momentum divergence, the snap-back rally is usually very sharp. Investors please note.
Based on my analysis, I expect a sharp rally phase starting now.
Also note that the recent low at 65p came within a whisker of exactly matching the 2003 low! Imagine – after a huge span of 18 years, the market has decided to revert to the same price (within 0.3% of the all-time high). How's that for accuracy?
I am placing this share solidly on my buy low/sell high list at the current 92p. Only an unexpected dip back to the 65p area would send me back to the drawing board.
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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