Rolls-Royce share price faces a crucial test: rally or retreat ahead?

Rolls-Royce share price has lost the momentum it had last year as it faces some major external challenges that threaten its profit targets. RR has remained inside the narrow range between 1,095p and 1,340p since February. Still, this consolidation may lead to a strong rebound in the coming weeks as its fundamentals remain intact.

Rolls-Royce is facing some key headwinds but management remains confident

Rolls-Royce Holdings, one of the biggest industrial companies in Europe, is doing relatively well despite pressure in some of its key businesses. Most of this pressure is coming from its civil aviation business, which has experienced some weakness this year.

In a report published on Sunday this week, IATA warned that airline profits will plunge this year because of the disruptions in the Middle East and the elevated jet fuel prices.

Rolls-Royce has acknowledged that its business is facing significant headwinds as a result of these challenges. Despite this, management has maintained that the company remains on track to meet its targets.

Furthermore, most of the industry disruptions have occurred in the narrow-body aircraft segment, while Rolls-Royce primarily focuses on the wide-body market.

Still, the main challenge the company faces is in terms of costs and supply chain issues. In a statement on Tuesday, Airbus warned that it may fail to hit its targets for Airbus A320 targets, citing Pratt & Whitney problems. It also said that it needs the biggest second half of the year to hit its targets.

These problems do not affect Rolls-Royce, which provides engines for Airbus A350 and A330 neo. Nonetheless, they provide color on the challenges the industry is facing today.

Rolls aims to be a big player in AI data centers

A potential catalyst for the Rolls-Royce share price is that it has become a beneficiary of the ongoing AI data center boom. The company operates a power segment that makes MTU backup generators and power systems that are widely used in the industry.

In most cases, these generators provide the data centers with backup power when the grid fails. Its generators are used by companies like Microsoft, Amazon, and Google.

In the most recent trading statement, the company said that its data center business was booming. Also, its power generation order intake across gas and diesel engines rose by 50% in the first quarter. This growth pushed its backlog to 7.3 billion pounds, a trend that will likely continue in the foreseeable future.

RR stock chart | Source: TradingView

The daily chart shows that the RR share has remained in a narrow range this year as the recent rally stalled. It has stayed between the key support and resistance levels at 1,095p and 1,340p in this period. This consolidation could be because investors are taking profits after the surge experienced in the past few years.

Technicals are sending mixed signals. On the positive side, this consolidation may be part of the bullish flag pattern, a common continuation sign in technical analysis. On the other hand, the Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO) have pointed downwards.

Therefore, the most likely scenario is where it remains inside this range for a while. More gains will be confirmed if it moves above the upper side of the horizontal channel. If this happens, the next key level to watch will be at 1,500p.