PALLADIUM TODAY: Resistance emerges

Short Term:
Medium Term:
Long Term:
Resistances:
R1 573 Dec 2015 high
R2 635 Apr 2016 high
R3 682 50% Fibo 2014>2016 drop ($911-452)
R4 693 200 DMA
R5 724-729 Former spike lows
R6 727 Oct 3, 2016 high
R7 735 61.8% Fibo 2014>2016 drop ($911-452)
R8 747 Aug 10 high
R9 767 20 DMA
R10 776.50 Dec 1 high
R11 797 Jan 24, 2017 high
R12 798-833 Resistance band Sep 2014-May 2015
R13 803 May 2015 high
Support:
S1 767 20 DMA
S2 766 40 DMA
S3 735 61.8% Fibo 2014>2016 drop ($911-452)
S4 724-27 Aug-Oct high/late-Nov support
S5 733 100 DMA
S6 712 UTL of Jan/Feb 2016 lows
S7 682 50% Fibo 2014>2016 drop ($911-452)
S8 635 Apr 2016 high
S9 611 61.8% Fibo Jun>Aug rally
S10 508 DTL from Sep 2014
S11 452 2016 low
Stochastics:Bullish
Legend:

BB – Bollinger band
DMA – daily moving average
Fibo – Fibonacci retracement level
MACD – moving average convergence divergence
U/DTL – up/downtrend line

Analysis

  • While palladium rallied on Wednesday after the FOMC rate decision, follow-through momentum struggled yesterday, as implied by the low upper shadow on yesterday’s candlestick formation.
  • The stochastics remain mildly bullish for now although further resistance is seen around $767 per oz from the 20 & 40 DMAs and towards the January high of $797.
  • Support is seen at the recent lows around $740 per oz.
  • Scaled-down support is seen from the 100 DMA at $733; it should be reinforced by UTL support from early 2016 at $712 and the 200 DMA at $693.

Macro factors

Global vehicle sales growth was strong last year, supporting rising demand for emission control devices. Passenger vehicle sales in the three largest markets (the USA, China and the EU) increased by 8.5% in 2016 to 56.5 million vehicles. Sales in Europe and, in particular, China enjoyed strong growth, with passenger vehicle sales surging by 6.8% and 13.7% respectively. But we believe sales will grow far more modestly in 2017; sales in China are forecast to climb a further 5% in 2017 to 29.4 million vehicles while sales in Europe are forecast to grow only 1% due to political and economic uncertainties. Passenger vehicle sales in China increased 8.8% in January-February and by 6.2% year-on-year in Europe. Sales in the USA contracted by 1.4% year-on-year in January-February.

Net length among Nymex speculators increased slightly in the week to March 7. It now totals 17,036 contracts and remains elevated, up 2,850 contracts or 20% in the year to date. But a more polarised view has emerged after funds added 979 contracts of new longs in addition to a 484-contract build in shorts. This suggests palladium is vulnerable to long liquidation or from wider re-engagement by shorts.

ETF holdings stand at 1.54 million oz compared with a recent low of 1.522 million oz following recent inflows in the South Africa-listed NewPalladium fund.  

Palladium’s fundamentals will continue to improve – fallout from Volkswagen’s Dieselgate scandal will lead to a shift away from diesel-powered vehicles in Europe. Carmaker Renault has suggested diesels could disappear from most of its European car range.

Nornickel – the world’s largest palladium producer – reported that palladium output from its own Russian feed totalled 609,000 oz in the fourth quarter, down 1% quarter-on-quarter. Full-year output from the company’s own Russian feed totalled 2.518 million oz, slightly above forecast but down 2% year-on-year due to lower ore grades and the reconfiguration of downstream production. Nornickel has output guidance of 2.63-2.73 million oz for 2017.

Johnson Matthey forecasts another year of substantial deficit in the global palladium market in 2017, with demand set to continue to outstrip growth in supply despite rising supply from recycling. This will build on the 651,000-oz deficit in 2016 forecast by JM. It sees total supply rising 1% to 9.03 million oz – a near-10% rise in recycling volumes will offset static mine production. Palladium demand from the autocatalyst sector will increase 2% to 7.8 million oz, fuelled by growth in sales of petrol-powered cars.

Conclusion

Palladium has rallied in line with risk appetite after economic projections from the Fed were deemed less hawkish than markets had been expecting. The background fundamentals remain constructive, with the global auto fleet set for another year of expansion, albeit at a modest pace, keeping the market in another year of supply deficit. But the emergence of overhead resistance suggests that downside risks remain in the short term, particularly while the speculative net length remains elevated.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.