PALLADIUM TODAY – Profit-taking after last week’s strong rally

Short Term: Medium Term: Long Term: Resistances: R1 700 Key level R2 710 200 WMA R3 748 2016 high (August) R4 750 Key resistance R5 884 DTL from 2000 high Support: 100 633 20 679 50 690 200 588 Support: S1 679 20 DMA S2 633 100 DMA S3 576 UTL (purple) S4 528 June low S5 449 2016 low Stochastics: Legend: DMA = Daily moving average. DMAs often correspond to support or resistance levels. Their slope is also important because it shows if the market can be supported on the upside (rising) or pressured on the downside (falling). WMA = Weekly moving average. MMA = Monthly moving average. UTL = Uptrend line. The momentum index allows us to determine whether momentum is positive or negative. We use a parameter equal to 10, corresponding to momentum over the past 10 days. Above 0, momentum is positive; below 0, momentum is negative. ADX – average directional index. This allows us to gauge the strength of the current trend (above 20, the trend is strong; below 20, the trend is weak). The combination of momentum and ADX allows us to determine the current trend (up or down) and its strength (strong or weak). Technical Comment Momentum has firmed above 0, suggesting an uptrend may be forming. ADX is just above 20 – the trend could be solid. Analysis Palladium has strengthened after finding some support around $650. The metal has returned to above its 20 DMA and 50 DMA although it remains below the $700 psychological level. The technical environment seems sound, with its key DMAs pointing higher. Has the downtrend since the 2016 peak ended? We think it is crucial to watch the 200 WMA – a break above it would suggest the uptrend has resumed (see our weekly chart). On the upside, palladium needs to break above $700 to reinforce the mini-rally. If it can, its next target would be the 2016 high. On the downside, we are watching four critical support levels – the 20 DMA, 100 DMA, the 200 DMA and the UTL. A break of all of these would clearly indicate a negative swing in sentiment; prices would probably return to their 2016 low. Macro drivers Palladium is in consolidation mode after rising four percent last week amid a broad-based rally across precious metals. Whether the downtrend since the 2016 peak in August has ended remains open to debate. This downtrend has been largely driven by long liquidation rather than fresh selling so perhaps spec sentiment has not deteriorated significantly; longs might have been forced to liquidate after building up positions too aggressively earlier this year. Once the pressure from long liquidation wanes, the uptrend could resume. We will scrutinise Friday’s COTR to analyse trading activity over September 20-27. Supply tightness in South Africa remains a key upside risk. NUM joined AMCU, the largest union in the South African platinum industry, in declaring a wage dispute after wage talks with Amplats foundered. AMCU declared disputes with Amplats, Implats and Lonmin earlier in September. Fresh negotiations aimed at resolving the deadlock are likely to last for three or four weeks. Failure to broker a deal would result in government mediation before a possible strike notice. Given the determination of unions and workers to fight for what they want, the probability of a prolonged strike is higher than the market is currently willing to admit. Autocatalyst demand, which corresponds to 75 percent of total palladium demand, is robust given rising global growth in auto sales. In the US, sales rose 0.8 percent in the first eight months from last year’s record high. In China, sales rose 12.8 percent year-on-year over the same period, largely thanks to a government tax break. In Europe sales were up 8.1 percent year-on-year in January-August 2016, including an increase of 10 percent year-on-year in August itself. Investment and speculative flows: Speculative positioning deteriorated for a sixth week in a row in the week to September 20. As we noted in our PGM COTR, we expect speculative selling pressure to continue in the coming weeks because of preceding excessive bullishness. But we do not yet see a negative swing in sentiment. ETF demand for palladium continues to deteriorate. ETF investors have continually liquidated their holdings, suggesting a lack of conviction about the sustainability of this year’s rally.  Supply/demand balance: The global palladium market will record a larger deficit of 843,000 ounces in 2016 compared with a deficit of 447,000 ounces in 2015, according to the latest Johnson Matthey forecast. This reflects a 1.5-percent increase in total supply to 9.01 million ounces and a 5.7-percent increase in palladium demand to 9.8 million ounces. Conclusion After a strong performance last week, palladium is consolidating a little because of strong resistance at $700. With the macro environment friendly for precious metals and risks to the supply/demand balance tilted to the upside for now, especially given developments in South Africa, we remain constructive over the very short term (around one month) and the short term (1-3 months).  From a trading perspective, we will stay on the sidelines but we may be inclined to implement a long position should palladium firmly break above the 200 WMA ($710), with a tight stop-loss below the 20 DMA. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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