In October 2021, I shared with you my technical outlook for palladium futures.
The chart structure was clear; therefore, I was confident of further collapse of palladium price. The results of your ballot are in the graph below.
Most of you voted for a bullish trend to resume. The second popular bet turned out to be the most accurate as the price has pierced the upper side of the preset bearish target area at $1,558.
The next step after two-leg consolidation was going to be a huge growth of the metal’s price. However, the industry fundamentals do not support that bold plan.
The automobile industry consumes around 85% of the world’s palladium supply these days. Hence, the auto-catalyst demand is the key driver of the market. At the same time, the market equation has changed as several new factors were added.
The rise of electric vehicles (EV) is one of those new factors, as battery-powered vehicles do not need palladium catalytic converters. This process is not fast; however, the pace is accelerating as traditional automakers are going to contribute to the new industry more and more. By 2030, the all-electric vehicle sales are estimated to reach half of the auto sales in the US, China, and Japan.
The next negative factor in palladium demand is the pandemics and related supply chain disruption that resulted in a global shortage of semiconductor chips and other auto parts. This strong headwind for automobile production is here and now. The largest car manufacturer Toyota has halted its production at 11 plants for three days, including this Monday, due to a parts shortage. That adds to the reductions planned for February that were announced earlier.
Another factor that undermines the demand comes from the recycling of used catalytic converters as fewer combustion engine cars will be sold and the existing fleet of aging cars will be replaced with EVs the more supply would appear from this part.
I put both scenarios in the chart below.
The technical outlook shows a bright future for palladium. The minimum drop area has been hit as leg 2 down is equal to leg 1. Now we can adjust the blue target for the upcoming CD segment as the C point could have been established. The target where the CD segment is equal to the AB part is located at the $3,900 mark; it is more than an 80% gain from the current level.
The price has advanced rapidly since it reversed from $1,531 as it has gained almost 40% now. The closest barrier is located at the top of the preceding consolidation at $2,217, another $100 to go.
The fundamentals-based scenario has been shown in pink and red. It implies the completion of the large bullish cycle last May at the all-time high of $3,019. After that, the first leg to the downside has emerged, with the bottom established last December at $1,531. Currently, we are in the retracement or “dead cat bounce.” It could reach the 61.8% Fibonacci retracement level at $2,450 before another collapse kicks off. The latter could ruin the price to the previous growth point of $452 amid the looming oversupply in the market.
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Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
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