Centrica share price is slowly forming a dangerous pattern

Centrica (LON: CNA) share price has bounced back in the past few days as investors bought the dip. The stock bounced back to a high of 156.10p on Tuesday, higher than last week’s low of 144.50p. In all, Centrica is one of the best-performing FTSE 100 stocks as it soared by more than 142% from its lowest point in December and by 440% from its 2020 lows.

Centrica stock price has done well in the past three years, helped by the company’s strong performance and shareholder returns. The most recent results revealed that the firm, which is the parent company of British Gas, did well in the first half of the year.

Centrica’s operating profit jumped to more than £2.1 billion, up from £1.3 billion in the same period in 2022. Its adjusted earnings per share jumped to 25.8p, up from the previous 11p while its free cash flow jumped to £3.1 billion. Net cash surged to £3.1 billion.

Most importantly, income investors have cheered the company’s returns to shareholders. It has hiked its dividends and increased its share buybacks. Share repurchases help to boost a company’s earnings per share by reducing the share count. It boosted its share buyback by £450 million.

A key concern among investors is whether the stock has more room to grow in the near term. In a recent note, analysts at Liberium downgraded the stock, pointing to its excessive valuation and overly optimistic assessment of long-term returns.

Centrica’s valuation seems reasonable. The company has a market cap of more than £8.6 billion and generated an operating profit of £3.308 billion in 2022. This makes it reasonably priced since it will make more money this year.

The daily chart shows that Centrica stock price has been in a strong bullish trend in the past three years. This rally saw it reach the year-to-date high of 172.20p in September. Since then, the stock has pulled back as investors take profits. 

It has constantly remained above the 100-day moving average, meaning that bulls have been in control. Now, the stock seems to be attempting to make a double-top pattern at 172.20p. In price action analysis, a double-top is one of the most bearish patterns.

Therefore, I suspect that the shares will continue soaring as buyers target the key resistance level at 172.20p (9.8% above the current level). A move above that price will invalidate the double-top pattern and point to more downside. 

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