Palladium: A Trend Changing Event or Correction Overshoot? – Plus another Commodity ETF with a Wedge Correction (Premium)

There are two commodity ETFs with falling wedge patterns working. One falling wedge resulted in a deep pullback and the other in a shallow pullback. Either way, I view these falling wedges as corrections within uptrends and am watching for breakouts. This article will look at the deep pullback in the Palladium ETF (PALL).

The falling wedge is a classic pattern that often forms as a correction within a bigger uptrend. First, there is some sort of uptrend present and/or a powerful move that signals the start of an uptrend. Second, there is a pullback that retraces a portion of the prior move and holds well above the prior low. Sometimes the pullback is deep and sometimes shallow. The correction ends when price breaks out of the wedge. This signals a resumption of the bigger uptrend and argues for further gains.

The chart below shows PALL with a ~100% advance that broke above the October-November highs and hit a 52-week high in March. The ETF then embarked on a ~40% decline that retraced well more than 2/3 of this advance and did not hold near the January breakout zone. A normal correction would retrace around 50% and hold the prior breakout. This one did not, but I still think it is a correction within a bigger uptrend because the prior 105% advance was also atypical. In other words, a big advance deserves a big correction. Such is the nature of subjective analysis.

The first indicator window shows the Trend Composite turning negative for two weeks and the Momentum Composite dipping to -5 (oversold) on May 12th. The Trend Composite flipped back to positive this week and I am now watching for a wedge breakout. A break above last week’s high could provide the first clue that this correction is ending and the immediate downtrend is reversing.

The Trend Composite aggregates trend signals in five trend-following indicators: Bollinger Bands, Keltner Channels, Commodity Channel Index, StochClose and Moving Average Trend. This indicator and ten others are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

A Falling Wedge for Coffee

The Coffee ETF (JO) sports a falling wedge and a less steep decline, but the decline was enough to turn the Trend Composite negative (-5). Ignoring the Trend Composite and simply focusing on the price chart, I can make the case for a normal correction within a bigger uptrend.

First, JO hit a new high in February and advanced some 70% from July to February. After the February peak, I was watching the falling flag/channel into March (blue dashed lines) and turned bullish on the breakout in early April. This breakout did not work out as JO fell below the March low. Losing trades happen.

Despite a brief lower low on May 9th, the falling wedge retraced 50% of the August-February advance and 67% of the July-February advance. Measuring retracements can be subjective when there is more than one low from which to start. In any case, the retracements (50% and 67%) are normal for a correction within a bigger uptrend and the falling wedge is also typical for a corrective pattern.  

As far as the three-month falling wedge is concerned, a break above the red resistance zone would be bullish and argue for a continuation of the bigger uptrend. There is also a smaller wedge breakout within the bigger wedge. Notice that JO surged above 60 in mid May, fell back into late May with a small falling wedge and surged 5.5% on Thursday. Intraday chartists can see this falling wedge in more detail on a 30min charts covering three weeks.

The Momentum Composite aggregates signals in five momentum-type indicators to identify short-term overbought and oversold conditions. This indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP

Next Week's Scheduling

  • Saturday – 28 May: ETF Trend Signal and Rank Table Update
  • Tuesday – 31 May: Market-ETF Report and Signal-Rank Table Update
  • Wednesday – 1 June: Market-ETF Video and Market Regime Update
  • Thursday – 2 June: Market-ETF Report and Signal-Rank Table Update

About the ETF Trends, Patterns and Setups Report

This report contains discretionary chart analysis based on my interpretation of the price charts. This is different from the fully systematic approach in the Trend Composite strategy series. In this ETF Trends, Patterns and Setups report, I am looking for leading uptrends and tradable setups within these uptrends. While I use indicators to help define the trend and identify oversold conditions within uptrends, the assessments are mostly based on price action and the price chart (higher highs, higher lows, patterns in play). Sometimes the chart assessment can be at odds with the indicators.

You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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