The metal finally broke out of its trading range this week. For those who read my market research and/or speak to me, you will know that I have been banging the drum in the expectation of a strong move to the upside. Even my patience was tested to the limit but this week the market finally played ball and reached its initial target. So what’s next for Palladium?
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Volkswagen Emissions Scandal:
Volkswagen shares have plunged around 50% over the past three days following the revelation late Friday that the U.S. Environment Protection Agency has issued a notice of violation accusing VW of installing so-called defeat devices in its diesel cars that automatically lower the output of toxic gases during official emissions test, leading to a lower measurement of emissions than the car actually produces. But what first looked like an affair affecting a single carmaker took a dramatic turn on Tuesday when Volkswagen announced that the scandal, first thought to involve only 482,000 cars in California, actually now is thought to affect over 11 million vehicles worldwide.
Platinum is a major component as an auto catalyst in diesel cars, whilst palladium has a major role in petrol cars. With sentiment shunning diesel over concern as to how far this scandal will spread, petrol as well as hybrid cars are more favoured, boosting demand for palladium as a result.
We’ve all heard about China’s slowdown. The effect of all this talk has had dramatic effects on world markets but it needs to be put into perspective. Despite the volatility, China is slowing, but it has slowed from being the world’s fastest growing economy to still being the world’s fastest growing economy. Its demand for resources to fuel its economy is enormous, whether it be with a 7.5+ GDP growth or a little less.
And on the back of that, China announced on Wednesday it will accelerate construction of electric car facilities. The auto industry accounts for about three-quarters of demand for palladium, according to Morgan Stanley. “They want to start doing more electric cars,” Peter Thomas, a senior vice president for metals at Zaner Group LLC in Chicago, said in a telephone interview, “If they’re speeding it up, it would make sense for palladium to go up.”
The metal bulls have finally managed to gain momentum and the ball is now firmly in their court. As you can see on the chart above, Palladium broke above the key $625 resistance level and has gone straight to my initial target of $665 [100 SMA – red line]. A direct break above the $655 level would be a very bullish signal. However a healthy correction from this level is my expectation and the pullback to $620 – $630 could provide a good risk reward entry point into the market targeting the $700 – $720 level [200 SMA – dark blue line]. I must stress that the palladium bulls have had a heck of an opportunity this week due to Volkswagen and China. The pullback will be key and as long as Palladium holds above $600 level, momentum will carry palladium higher.
Palladium’s move higher this week is undoubtedly encouraging and could be the start of a strong move targeting at least the $700 – $720 resistance level. The nature of the pullback from the current high is going to hold the key. Hold above $600 and this market is poised to break considerably higher. I am in the bulls camp until proven otherwise.