The Rolls-Royce share price is in a major downward trend this week. On Tuesday, it ended the day at 105p, which is 18% below this year’s high of 128p.
What happened: Rolls-Royce has faced two major challenges this week. First, many countries, including France and Germany have reported more coronavirus cases. This has pushed them to reinstate some lockdown measures to curb the spread. Subsequently, airline shares like IAG and EasyJet have all declined as investors start cautioning whether the industry will bounce back by summer. Without a quick recovery, RR could go through a substantial long period to recover.
Second, as we had reported earlier, Rolls-Royce was facing challenges in Norway, where it has been trying to sell a company. In a statement yesterday, the Norwegian government blocked the sale of the maritime engine maker to a Russian company. The government said the sale would have led to substantial security risks. The minister said:
“We now have sufficient information to conclude that it is necessary to prevent the company from being sold to a group controlled from a country with which we do not have security cooperation.”
This means that the process to sell the company could take longer. Still, with many private equity firms loaded with cash, there is a possibility that finding a buyer will be relatively easy. The firm wants to raise more than $178 million.
On Monday, I questioned whether the rally of the Rolls-Royce share price was still intact. Turns out, it was the right time to ask since the shares have dropped by more than 18% since then. It has also dropped to the lowest level since February 23. The 25-day and 50-day moving averages are close to forming a bearish crossover pattern.
The Relative Strength Index (RSI) has moved to the oversold zone. Therefore, while the stock is still bearish, we should expect a pullback in the near term as investors rush to buy the dip. This could see it retest the resistance at 113p. However, we should not rule out further drops below 100p.
