yes, you are right - you found an answer by yourself.
this effect is very limited, not only by palette ram. it also needs an image (static backgound) in neogeo-rgb-raw format (304 * 224 * word ~136kb).
you can not use this for shadows... but I got another idea... also palette-based...
I would change the background from 16x16 to 12x12 (using sprite shrinking) because your 'stones' are based on this... now you can use a darker palette to fake a flicker-free static shadow!