Time For Palladium To Reaffirm Its Leadership?

JC Parets
June 8, 2020

From the desk of Tom Bruni @BruniCharting

From a Precious Metals' perspective, Palladium has been a clear leader for over a decade. Despite its strong long-term performance, a sharp March drawdown has people wondering whether this is the end of  its reign over the Precious Metals' space.

In this post, we're going to outline our "keep it simple stupid" approach to answering that very question.

Let's jump into it.

First, let's take a look at Palladium's longer-term daily chart. After a failed breakout and bearish momentum divergence confirmed in late February, prices fell roughly 50% from their highs and swiftly recovered. Since then prices have been meandering around...but from a structural perspective, it still looks like we've got higher highs and higher lows.

Click on the chart to enlarge view.

A closer look at the last two months of action shows prices forming a nice base above the 61.8% Fibonacci Retracement of their late-March recovery rally. If bears had any teeth, we'd see prices pressing to new lows over the last few weeks as the other Precious Metals have cooled off a bit. Instead, they formed a higher low and are working higher.

At the very least, the above chart tells us that if prices are above their recent lows of 1,740 then the short-term path of least resistance is higher.

On a relative basis, Palladium is also at a critical juncture versus an equally-weighted basket of Gold, Silver, Platinum, and Palladium. It has tested a long-term level of support/resistance near 3.85 several times in 2020 and is now beginning to turn higher. After breaking out of an 18-year base, the higher-probability outcome here would be a retest of its all-time highs set in 2001 rather than a sharp trend reversal and subsequent collapse.

Let's put all this information together and get to the point.

The way we see it is that Palladium is at a critical juncture in the short-term. If the last 2 months of consolidation does NOT resolve higher and instead resolves lower (by breaking 1740), then we get confirmation that its structural uptrend has shifted to a sideways trend on an absolute basis.

And if that's happening, then we're also likely seeing it break its recent lows relative to the Equally-Weighted Precious Metals' Index, which would shift its relative trend from up to sideways.

And if those two conditions are playing out, we cannot own Palladium.

But...that's not the bet we're making. Instead, we're looking for this consolidation to resolve in the direction of the underlying trend and for Palladium to re-accelerate its outperformance in the space.

For those looking to take advantage of this potential acceleration over the intermediate-term, we've got two options.

  1. Own it above 1,740 and anticipate a move back towards 2,325 and its all-time highs; or
  2. Wait for the resolution and buy strength above 2,325 for a longer-term move towards 3,475.

Commercial Hedgers are also nearing a net long position in Palladium, not something that has happened very frequently since the late 1990s and early 2000s...but when it does there's usually a reason for it. Whether or not they know something this time remains to be seen, but for now, the weight of the evidence suggests we should be betting alongside them.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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