News Driven Platinum Rally Nearing Technical Resistance

Platinum futures continued to soar this week, reaching their highest level in more than three months on news of production disruptions at a large South African platinum mine.

October Platinum futures rose to $1563.50 in the August 23 overnight session, reaching its highest level since May 3.

The most active platinum futures contract may have bottomed at $1378.50 on July 24, but it began its current upward drive on August 16, almost six days after some workers at a mine in Marikana in South Africa began an illegal strike. Last week’s violence which led to the death of 44 people following skirmishes between striking workers and police was the event that triggered the current breakout rally.

Daily October Platinum Pattern, Price & Time Analysis

Daily October Platinum Pattern, Price & Time Analysis

Conflicting reports concerning the strike’s impact on production is another driving force behind the rally. Earlier in the week, Lonmin PLC, a South African mining company, called the strike’s impact on production “insignificant”, however, officials later said that a limited amount of workers showed up for work, making it unable to resume production.

Platinum prices are up a little more than $150 since the deadly violence began on August 15. Since basing between $1378.50 and $1382.70 during the last week in July to the early part of August, platinum prices have surged a little less than $200 per ounce.

Technically, as of August 23, October Platinum has recovered 50% of the break from the February 29 top at $1741.40 to the July 24 bottom at $1378.50. This key price level at $1559.95 was tested on August 23.

Gann angle analysis shows that the market has been advancing at a rate of $8.00 per day since reaching a bottom at $1378.00. If it continues on this pace it should reach the Fibonacci or 61.8% retracement level at $1602.77 on August 31.

A vertical rise in prices often catches the eye of speculators who tend to jump into the market based on the spike in volatility. Since the market is trading inside of a major retracement zone, price selection should be watched and traders should be careful about buying inside of this zone unless they have a pre-defined exit. Furthermore, unlike a weather market which is at the mercy of nature, a strike-driven market can end at any time, leading to a violent set-back. If the market were to retrace its current rally, it could pull back to $1471.00 rather quickly.

Investors who wish to attempt to avoid the potential volatility in the platinum futures market may want to consider trading a platinum-related stock or ETF. Three stocks to watch include:  North American Palladium (PAL), Stillwater Mining (SWC) and Lonmin Plc ADS (LNMIY). The platinum ETF’s symbol is PPLT.

James A. Hyerczyk Forex, Futures & Equities Analysis

Daily PAL Pattern, Price & Time Analysis

North American Palladium (PAL) has rallied from $1.47 on August 10 when the South African platinum mine strike began to $1.67 on August 17. Although this company deals primarily with palladium, it could benefit from higher platinum prices. The first near-term target is Gann angle resistance at $2.06, followed by a 50% price level at $2.37.

James A. Hyerczyk Forex, Futures & Equities Analyst

Daily SWC Pattern, Price & Time Analysis

The movement on the daily chart of Stillwater Mining (SWC) almost mirrors the action on the October Platinum chart. After topping at $15.24 on February 24 and bottoming at $7.47 on July 24, this stock is now in a position to test the retracement zone at $11.36 to $12.27. Like the platinum market however, this stock could reverse quickly if the strike settles or the violence subsides.

James A. Hyerczyk Forex, Futures & Equities Analyst

Daily LNMIY Pattern, Price & Time Analysis

One stock not benefiting from higher platinum prices is Lonmin Plc ADS (LNMIY).  The center of attention is on this stock because of the strike’s direct impact on this company’s earnings. This sell-off in this stock is a good example of why an investor should diversify his risk when investing in a company that faces exposure to the supply and demand forces of a specific commodity. One way to spread the risk is to invest in a commodity-linked ETF.

James A. Hyerczyk Forex, Futures & Equities Analyst

Daily PPLT Pattern, Price & Time Analysis

 Instead of investing directly in a platinum sensitive company or in the leveraged platinum futures market, one may consider adding the ETFS Physical Platinum Shares (PPLT) to their portfolio.  This market topped at $171.46 on February 29 and bottomed at $135.80, creating a retracement zone at $153.63 to $157.84.

Since changing its main trend to up on the daily chart when it crossed $140.74 last week, PPLT has surged to the upside on high volatility and rising volume. The close on August 22 has put this market in a strong position to challenge the 50% to 61.8% retracement zone.

With the platinum market being driven by a speculative event, it may change direction at any time so traders should have an exit identified if the market reacts negatively following the first test of the retracement zone.

The current rally in October Platinum is similar to the rally in corn and soybeans in that it is being triggered by supply concerns. The difference is that corn and soybeans are subject to weather than tends to be unpredictable. Furthermore, since they are seasonal commodities, they cannot be replaced over the short-run.

The reason behind the current platinum rally is a cut in production because of a strike. Although supply is being affected at this time, the strike is not expected to go on indefinitely and once settled, workers may be able to make up the drop in production with overtime. This is why traders should consider a few different strategies when trying to take advantage of the increased volatility in platinum.

Trading the futures markets can give the trader more bang for the buck because of the leverage, but leverage is a two-way street so some traders may not want to face the added exposure especially as the contract nears a key retracement zone. Another way to trade the move in platinum is to trade in platinum-linked stocks, but this can also be a risky move if the wrong company is selected. A commodity-linked ETF may offer the best combination of diversification and risk control.

Traders should consider all strategies before committing to the long-side of this event driven rally. Some aggressive traders may even want to consider the short-side if prices get overvalued and the striking workers reach an agreement with management.

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