Interactive Investor

What can Babcock’s performance tell us about the FTSE 100?

Defence stock’s profit warning does not bode well, but optimism is still possible.

20th January 2021 08:40

Alistair Strang from Trends and Targets

Defence stock’s profit warning does not bode well, but optimism is still possible.

Babcock International

At the tail end of last year we warned of impending damage to the FTSE 100 if our fears of a rash of profit warnings came to fruition.

Babcock International (LSE: BAB) stepped up to the crease last week with a profit warning and a 20% dive in the share price. It doesn’t take a brain the size of a planet to figure out where the UK index shall head if a rash of companies start issuing negative news at the same time.

Thankfully (perhaps even amazingly, if behaviour of US banks this earnings season proves an accurate guide) we may face the unlikely situation of the UK banking sector proving strong against the background of a foul market.

The immediate situation for Babcock’s share price is far from encouraging. Last Friday’s news has now sent the share price below an uptrend from 2004, with the immediate situation looking bleak.

To be blunt, in the case of Babcock it almost feels like the share price intends to return to levels last seen a painfully long time ago. Continued travel below 195p threatens to provoke a cycle down to an initial 132p with secondary, if broken, at a longer-term 55p.

Usually with this sort of thing we provide a caveat, suggesting nothing threatens this at present. This would be untrue in the case of Babcock International, as its share price looks rather less than watertight.

Thankfully, there's a pretty well-defined path for shares to escape such a miserable doom.

Firstly, we need the share price to close a session above the red line on the chart below, signalling the market is aware of the risks and intends to correct the damage. Currently, this demands the share price close a session above 206p. Such a scenario would show the first suggestion was all a dreadful mistake.

Secondly, the share shall need broadcast some sort of signal that ‘bottom is in’. In this instance, we'd raise an eyebrow should it start trading intraday above 237p.

This is liable to prove a good thing, allowing for initial recovery toward 260p. If bettered, things become a little vague but 342p calculates as possible. In reality, we shall prefer taking a further look at the tea leaves if 260p makes an appearance.

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.

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