Very short term (1M):   Up
Short term (3M): Up
Medium term (6M): Up
Long term (12M): Up
Resistances:
R1 1,765 100 DMA
R2 1,871 Jul high
R3 1,951 Mar high
Support:
S1 1,728 Nov low
S2 1,705 2019 low 
S3 1,676.50 Jan 2017 low
Stochastics:
Flat-line
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 LME aluminium price was constrained on Wednesday December 11. The upside is capped at the 100 DMA while the 50 DMA is acting as nearby technical support in the very short term.
  • Still, this fits with our technical assessment that the metal will trade sideways within the constricted wedge-like pattern (see chart) for some time. 
  • Only a technical breakout from the DTL off the March high or the UTL off the October low will trigger a fresh directional run.
Macro drivers
While global investors wait for US President Donald Trump's final decision about December 15 tariffs on $165 billion on Chinese goods, the base metals continue to climb, which we think is due to short-covering while sellers look to cash in and/or cover some of their bearish exposure. We would also argue that recent upside was not supported by major buying simply because big players remain on the sidelines and will only emerge, supporting the rebound in prices, after any deal is signed.

The emergence of a contango in LME forward spreads, especially for early next year - January and February - boosted aluminium premiums in Rotterdam in the week to December 10. A trading source in Europe told Fastmarkets that easier spreads should allow LME aluminium premiums to increase, albeit slowly. This is because the backwardation in the December-January spread has capped the uptrend in premiums even though it has eased to $9.00 per tonne from $13.00 per tonne. Meanwhile, a lack of spot activity and buying interest in the United States and Asia have kept aluminium premiums unchanged.

Aluminium's micro dynamics are not price-supportive. In stock moves, inflow of 15,000 tonnes offset outflow 2,025 tonnes, raising LME stocks to 1,343,800 tonnes. Speculative funds positioning among LME fund managers has been negative - selling returned in the week to December 6, with the net short fund position (NSFP) expanding to 34,352 lots. Longs liquidated a total of 2,570 lots, which was reinforced by 1,664 lots added by shorts. Aluminium has the largest bearish exposure of the base metals.

The supply outlook looks healthy. A lack of discipline among Chinese alumina producers meant the domestic market was oversupplied by 620,000 tonnes in the first 10 months of 2019. Delegates at a recent Antaike aluminium conference expressed called for domestic producers to cut alumina output and undertake a more “rational investment [in new] alumina projects” to cool China’s enthusiasm for production. Still, production cuts are emerging - Hydro plans to cut output at its Slovalco aluminium smelter, according to reports.

But the combination of weak macroeconomic factors alongside an anticipated increase in global aluminium supply has increased expectations that more market participants will purchase the metal with the intention of holding it and financing it for long-term gain. 

Conclusion
We foresee more sideways trading LME aluminium in the short term but would not be surprised by a spike in market volatility, depending on developments in the the US-China trade conflict.


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