BAE Systems share price to face volatility as risky patterns form

BAE Systems share price jas done well in the past few months, moving from a low of 1,588p in December to a high of 2,160p. It then pulled back to the current 1,973p. This article explores why the BA stock may pull back after forming an island reversal and a bearish engulfing pattern.

BAE Systems share price technical analysis 

The daily timeframe chart shows that the BA stock has remained under pressure in the past few days, moving from a high of 2,159p on January 19 to the current 1,973p.

It has formed a series of risky chart patterns, pointing to more downside in the coming weeks. For example, it formed a shooting star pattern on January 19. This pattern is made up of a long upper shadow and a small body.

The stock has formed a bearish engulfing pattern, which is characterized by a big red candle that follows and fully covers a small bullish one. This pattern also leads to a big reversal over time.

Most importantly, the stock has formed an island reversal pattern, which happens after an asset jumps and forms a gap. In this case, this gap happened on January 7 as geopolitical risks rose following Donald Trump's arrest of Nicholas Maduro.

The two lines of the MACD indicator have formed a bearish reversal pattern and are pointing downwards. Also, the Relative Strength Index (RSI) has moved from the overbought level at 84 to the current 55.

Therefore, the most likely scenario is where the BAE Systems share price continues falling as sellers continue filling the gap, a move that will bring it to the key support level at 1,900p, which coincides with the highest point in October last year.

BAE Systems chart | Source: TradingView

BAE Systems' business is doing well and has major catalysts 

The bearish outlook for the BAE Systems stock price is based on its technicals. Its fundamentals show that the company is doing well as demand for military equipment in the United States and Europe rise.

Donald Trump has called for defense spending to jump from the current $1 trillion a year to $1.5 trillion, a figure that is much higher than other countries combined. While such a move will hurt America’s finances, it will benefit defense contractors, of which BAE Systems is one of the biggest ones.

Trump has also pushed NATO member countries to boost their defense spending to 5% of their GDP from the current 2%. Such a move will likely lead to more demand for BAE Systems equipment over time.

Index, the most recent results showed that the company’s sales are growing. Its sales rose from £13.4 billion in the first half of 2024 to £14.6 billion, while its adjusted EBIT moved to £1.6 billion from the previous £1.4 billion.

The company ended that period with a backlog of £75 billion pounds and a pipeline of £180 billion. This growth will come from its diverse revenue sources across key industries like electronic systems, air, maritime, cyber, and intelligence, and platforms & services.

At the same time, the company continues to return funds to investors. It returned £1.5 billion to investors through a combination of dividends and share buybacks. 

The next key catalyst for the BAE Systems share price will be its earnings, which will come out on February 18. Analysts expect the results to show that its revenue will be £31 billion, while its underlying EBIT will be over £3.3 billion.