 Palacios, along with brothers Milton, Jerry, Johnny and Edwin, started his career as a footballer with Victoria, from which all five players were later transferred to Olimpia.Palacios made 102 appearances and scored 32 goals for Olimpia.He became one of the idols of the team and quickly started to attract international attention after winning five league titles with Olimpia in the 2002–03 Apertura tournament, as well as the 2003–04 Clausura, 2004–05 Clasura, 2005–06 Apertura and the 2005–06 Clausura tournaments.