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Diageo share price rally fizzles out: Here’s why DGE may drop 10%

The Diageo share price may have run a little too far. Concerns over a resurgent Covid virus may lead to a sharp reversal, leaving investors with a hangover.

UK headquartered alcoholic beverage behemoth Diageo Plc (LSE: DGE) has had quite a run over the last year. Only a month ago, DGE shares set a new all-time high of 3,574.5p.

Investors were drawn to the multi-national after the firm revealed plans to return £4.5 billion to investors over the next three years. Furthermore, the brewer projects an operating growth of more than 14% this year.

Of course, this is likely dependent on the re-opening policies that have started to commence globally. However, the threat posed by the Delta variant strain of the virus could put this optimistic projection in doubt.

Countries worldwide are paying close attention to the spread of the mutated virus, with several nations re-entering lockdowns of some degree and many more prepared to do so if the situation worsens.

This may cause investors to shy away from DGE, which trades at a dizzy 30x multiple.

Furthermore, today’s price action has dragged the Diageo share price to a key support level, and should it fail, 3,060p looks like an achievable downside target.

DGE price forecast

The daily chart illustrates the clear horizontal resistance at 3,510p, just below June’s ATH. Additionally, we also see DGE tested the 50-day moving average at 3,428p in this morning’s dip to 3,424p.

For now, the moving average remains intact. However, if the price finishes the day below 3,424p, the next logical destination is the 100-day average at 3,255p, followed by the previous 2021 high at 3,060p. This support level is reinforced by the appearance of the 200 DMA at 3,049.6p. Therefore, this should provide a substantial base for DGE.

The bearish outlook remains valid below 3,510p. And should the price advance beyond this point, a new ATH may follow. But for now, I view the bearish scenario as the likeliest.

Diageo share price chart (daily)

diageo share price

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