What next for the Rolls-Royce share price as it falls into a correction?

Rolls-Royce share price has dived sharply in the past few months. It has dropped by over 15% from its highest point this year, remaining in a technical correction. RR stock was trading at 1,190p, and the weakness may continue as the Iran war continues.

Rolls-Royce Holdings business is being impacted by the Iran war 

Rolls-Royce, a top British industrial giant, is facing major headwinds that may prevent it from achieving its annual targets this year.

The company's business is being affected in two main ways. First, the ongoing war has led to a surge in raw material costs, especially aluminum, whose price has soared in the past few weeks. 

Aluminum jumped after a major plant in Qatar was attacked, with analysts expecting that the plant will take more than a year to come back online. More plants will likely be attacked if the war continues.

Rolls-Royce Holdings is also impacted by the weakness in the civil aviation industry. While engine deliveries will continue this year, the main challenge is that air traffic has continued to deteriorate. Most of this weakness is happening in the Middle East, where people have stopped traveling.

The crisis could escalate as countries, especially in Europe and Asia, start rationing their jet fuel, while many airlines have announced plans to cut flights. In a recent note, the head of United Airlines said:

"If prices stayed at this level, it would mean an extra $11 billion in annual expense just for jet fuel. For perspective, in United's best year ever, we made less than $5B."

Rolls-Royce business is exposed to flight cancellations because of its business model, which involves conducting services to aircraft in long-term contracts. It makes more money based on flying hours, meaning that a decline could have an impact on its business.

Still, on the positive side, the war will ultimately end, which will reverse the losses experienced as it continued.

The most recent data showed that Rolls-Royce Holdings continued doing well last year, with its civil aviation revenue rising by 15% to over £10.3 billion and its operating profit rising by 41% to over £2.13 billion. 

The same growth momentum continued in the defense segment, where revenue rising by 8% to over £4.7 billion, while the operating profit rose to over £689 million. Analysts expect that Rolls-Royce’s revenue will jump to £21 billion this year to over £25 billion in 2025.

Rolls-Royce share price technical analysis 

RR stock chart | Source: TradingView 

The daily timeframe chart shows that the RR stock price has crashed from the all-time high of 1,420p on February 26 to a low of 1,079p last week.

On the positive side, the stock formed a falling wedge pattern, a popular bullish reversal sign in technical analysis. It has now moved above the upper side of the wedge and has retested it again. A break-and-retest pattern is a common bullish reversal sign.

The stock has jumped above the 200-day Exponential Moving Average (EMA). It has moved slightly above the Strong, Pivot, and Reverse level of the Murrey Math Lines tool.

Therefore, the most likely scenario is where the stock remains under pressure in the near term followed by a rebound when the war ends. If this happens, the stock will likely rally to the year-to-date high of 1,420p, followed by the ultimate resistance level at 1,500p.