Here’s how Rolls-Royce shares could fly again

Grounded by the pandemic, this technical analyst explains why he anticipates a resurgence at Rolls. 

We keep stumbling across references to Rolls-Royce (LSE:RR.) and electricity. From cunning plans to power cities, using small nuclear reactors, to the news they intend to fly a light aircraft above 300mph, creating a new world record, pretty clear signals are being given of a coming attempt to expand beyond dependence on large aircraft engines. 

As expected, the company announced massive losses for 2020, the pandemic stifling any demand from a grounded aviation industry. The clever plan of leasing engines to operators worked well when Rolls Royce could charge when their engines were being used. But with air travel effectively grounded, Rolls lost its major income stream as they only were paid for every hour their engines were in use. Doubtless, with a return to normality, Rolls-Royce shall again find dollar signs flowing out of the taps at their Derby offices.

In terms of share price, since February we’ve been expecting Rolls-Royce to bottom at around 82p, a number which has assumed magical qualities and remained utterly invisible. 

Instead, the lowest achieved has been around 100p and we’re starting to suspect some real strength may be waiting below the surface. This being the case, we can assemble a scenario where near-term movement above 110p should promote price recovery toward a fairly useful 130p. 

• The UK’s best-performing shares during the pandemic
• ii view: Rolls-Royce reports massive loss but more optimistic
• Check out our award-winning stocks and shares ISA

Visually, there’s a heck of an argument anticipating some hesitation, should the 130p level make an appearance. Only with closure above the 130p shall we feel justified in expressing hope for the longer term as a complex path toward 204p becomes possible.

This, unfortunately, represents a target of one-third of Rolls’ pre-pandemic price, suggesting the share has a long way to go to promote the concept of miracle growth. Visually, the price needs to close above the immediate blue downtrend, currently 290p, to hint at the presence of true climbing ability. 

We think Rolls-Royce shares shall merit close attention should the market find reason to start “gapping” the price up at the open. Any initiative such as this is liable to make the share move faster than price behaviour for this year indicates.

Source: Trends and Targets. Past performance is not a guide to future performance

Alistair Strang has led high-profile and "top secret" software projects since the late 1970s and won the original John Logie Baird Award for inventors and innovators. After the financial crash, he wanted to know "how it worked" with a view to mimicking existing trading formulas and predicting what was coming next. His results speak for themselves as he continually refines the methodology.

Alistair Strang is a freelance contributor and not a direct employee of Interactive Investor. All correspondence is with Alistair Strang, who for these purposes is deemed a third-party supplier. Buying, selling and investing in shares is not without risk. Market and company movement will affect your performance and you may get back less than you invest. Neither Alistair Strang or Interactive Investor will be responsible for any losses that may be incurred as a result of following a trading idea.