Very short term (1M):   Up
Short term (3M): Up
Medium term (6M): Up
Long term (12M): Up
Resistances:
R1 1,838 June high
R2 1,951 2019 high
R3 2,000 psychological
Support:
S1 1,798 50 DMA
S2 1,745 June 2019 low 
S3 1,676.50 Jan 2017 low
Stochastics:
Turned lower
Legend:

BB – Bollinger band
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
DTL – downtrend line
RSI – relative strength index
UTL – uptrend line
H&S – head-and-shoulder pattern

Analysis
  • The rebound rally since the July 2 low at $1,771,50 per tonne was struggling to find decent bids on Friday July 5.
  • Instead, the daily doji candlestick suggest indecision on that day as buyers and sellers were unable to dominate the complex.
  • Still, with LME aluminium price action closing above the 20 and 50 DMA, its price action is well positioned to attempt higher prices in the short-term. 
  • Also, the potential 20 and 50 DMA bullish cross-over could give the light metal that extra boost (see chart) and might just give it enough firepower to get through the inverse head and shoulder formation neckline. 
  • As such, we will stick with our short-term bullish view towards LME aluminium given the fact that its technical configuration remains fairly supportive of more upside. 
Macro drivers
The forecast-beating US non-farm payrolls reading for June of 224,000 - well above the estimated 160,000 - raised major questions about the certainty of an interest-rate cut by the US Federal Reserve. The dollar index enjoyed a sizeable rally on Friday, peaking at 97.45, while the London Metal Exchange base metals prices came under renewed selling pressure and closed on a negative note apart from nickel. The dollar index remains firm at 97.22; the buying pressure in LME aluminium looks subdued at the time of writing, up a mere 0.2% and trading just above the psychological price level of $1,800 per tonne.

But the continued shrinkage in in global visible stocks is providing mild support. SHFE stocks to 421,712 tonnes in the week to July 5 - they are down by 37% so far in 2019 -and LME stocks have fallen 964,400 tonnes. While this looks positive in theory, the lack of excitement in LME aluminium's price action suggests that market participants are not convinced.

This is perhaps due to the prospect of rising global supply in the second half of 2019, especially from China. Fastmarkets forecasts a rise in Chinese aluminium capacity of 8.6% or 3.45 million tonnes to 43.05 million tonnes from 39.6 million tonnes at the end of 2018. Chinese aluminium production capacity should increase this year through capacity swaps and replacements, with most new projects already under construction.

Also weighing on sentiment is UC Rusal reporting an increase in global production of 1.3% in 2018 to 3.753 million tonnes. Fastmarkets learnt on July 3 that the ABI aluminium will restart later this month and aims to return to full capacity of 413,000 tonnes per year by the second quarter of 2020.

Negative macroeconomic events have also undermined demand. The US-China trade war and the potential implementation of US-EU car tariffs could have a negative impact for aluminium from the automotive sector. Spot physical activity is set to slow for the seasonal summer slowdown.

Still, the fundamental backdrop remains fairly tight, according to the World Bureau of Metal Statistics (WBMS). The study group pegged the deficit in the global aluminium market at 143,000 tonnes in the first four months of 2019 despite the fact that global production rose by 1.3% over the that period, with Chinese output accounting for 57% of total global production. Still, this failed to provide sufficient support for a serious challenge higher yet.

Conclusion
The healthy short-covering among LME fund managers and the improved technical configuration suggests there is more upside in the short term. But the complex will need something more concrete to sustain the buying pressure to break above the neckline as well as the 100 DMA. Another rejection at the 100 DMA will suggest that this is merely another dead-cat bounce and there is more downside in store.


All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.