Plotting Platinum

10/20/00 02:46:16 PM

by David Penn

Prices in the precious metal tested historic highs at the beginning of September. Will a retreat follow?

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While gold wanes and silver languishes, platinum soars. The precious metal is enjoying prices not seen since 1986-1989, when the metal regularly traded between $550 per troy ounce and $610. On the eve of expiration, the October platinum contract has ridden the tail end of a late September rally which has brought prices to as much as $595.

Platinum futures on the year have been in a fairly steady uptrend. Prices briefly spiking up toward $600 at the beginning of August as can be seen in the chart of the January 2001 contracts. Bears quickly shaved seven-odd percent off those highs, returning platinum to a $560-580 trading range that had begun in mid-July and continued until the end of August. Rising prices at the end of August returned platinum to its brief highs of the month, closing over $600 for six consecutive trading sessions before retreating back toward the most recent range. This downward movement broke through platinum's upward support trendline, a trendline that connects the lows from May to the low touched at the beginning of June and the lows along the bottom of the $560-580 trading range in August.

Rising prices meet declining relative strength and the result is a downside breakout beneath an April-September support trendline. Resumption of the trading range between $500 and $580 follows.

Graphic provided by: FutureSource.com.

At this point, there are three options for platinum. Finding support at $560, prices may use that support to return to previous highs north of $600. Or, should platinum fail to establish a position above $600, prices could tumble beneath the $560 range, perhaps seeking support in the $520 area. Reactions to intermediate highs in the January 2001 platinum contract often have been $45 or more: the reaction to the June, early August, and early September highs were all of this magnitude. Thus, profit-taking from a failed climb above $600 could easily swipe seven percent from that high. Lastly, there is a high likelihood that platinum will do neither of the above and instead seek to establish a trading range between $560 and $580.

Why a preference for the $560-580 trading range as the most likely short-term outcome? Foremost, although platinum is pursuing historically high levels, the relative strength index (RSI) suggests some waning strength accompanying the October high relative to the previous highs in September and August. There is also some worthwhile divergence between price action at the top and the RSI; successively higher peaks in price from August to September are countered by successively lower peaks in the RSI (the third peak, the October peak, in both charts is lower than the previous three). The RSI suggests that the highs recently reached are likely overdone and in need of modest correction.

Should the trading range be breached, the likelihood is of prices popping out on the downside. Two factors in particular encourage this conjecture: 1) the phenomenon of prices retesting historic highs on weakening relative strength, and 2) downside violation of the upward trendline in September coupled with the failure of prices to make a run on that line from below. Yet, even in this event, moderation is more to be expected than cataclysm. While outstanding fundamental effects can have a significant impact on platinum --which "suffers" from chronic undersupply issues --those challenges on the horizon appear to be either benign or supply-positive: U.S. automakers still represent a large and reliable part of the consumer base for platinum (which is used in catalytic converters as well as in fuel cells), and the end of a month-long strike at the world's largest platinum producer in South Africa.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Plotting Platinum

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