ALUMINIUM TODAY – Looking more bullish despite fundamentals

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1577 Sideways channel top
R2 1628 20 DMA
R3 1642 June 23 peak
R4 1686 April high
R5 1730-1745
R6 1754 DTL
Support:
S1 1628 20 DMA
S2 1621 Steep UTL
S3 1592 Brexit-dip
S4 1531 May low
S5 1475 March low
S6 1432.50 Nov low
S7 1270 2009 low
S8 1251 2001 low
Stochastics:Bullish
Legend:

DMA = Daily moving average

HSL = Horizontal support line

MACD = Moving average convergence divergence

Fibo = Fibonacci retracement level

H&S = Head-and-shoulder pattern

D/UTL = downtrend/uptrend line

Analysis

  • Aluminium has set off on another strong up leg after the Brexit-inspired downward knee-jerk reaction; prices have now moved up into the shadows of the April high. 
  • The overall rebound suggests the May weakness was simply consolidation after the accelerated March-April rally.
  • We now wait to see if aluminium joins, zinc, nickel and tin – all have pushed up through the peaks seen earlier in the year.
  • A weekly chart (not shown) shows a developing upward trend; looking at the chart overall, prices are still quite low compared with 2013 and 2014.
  • The chart has recently been suggesting the bulls are in control. While last week’s movement supported that view, prices have been oscillating sideways more recently.
  • We had generally expected the solid support evident around $1,530 to keep prices rangebound but it now looks as though the market is considerably more bullish. We would not be surprised if prices push higher.

Macro factors

Although the big picture is bearish for aluminium if taking into account all the off-market stock, while the metal remains off market the ‘market fundamentals’ are not so bearish. Liquidity on the LME seems can turn tight; the potential for tightness seems to be deterring shorts and, more importantly, prompting short-covering, which seems to be one of the main bullish factors.

The gross short position has fallen to 136,221 lots from a peak this year of 257,377 lots. More recently, longs have started to add positions after an extended period of long liquidation. The gross long position stands at 266,145 lots, up from 254,167 lots late in May but down from a peak of 384,861 lots in August last year. 

LME stocks continue to drift lower at a rate that averaged 6,641 tonnes per day (tpd) in the second quarter and 6,647 tpd in the first quarter. Cancelled warrants are steady at around 43 percent of total stocks.

With LME stocks at 2.36 million tonnes and cancelled warrants at 1.01 million tonnes, available stocks are 1.35 million tonnes, equivalent to 54,000 lots. But we would imagine that a considerable amount of the non-cancelled warrants in the LME are likely to be tied into financing deals, which may be why liquidity does tighten sporadically.

C-3s was last at $12/25-10.25 contango, slightly easier than of late, which may well indicate some profit-taking by longs which would require nearby lending.

The physical market remains weak, suggesting the strength in prices is more investment/fund-orientated.

Given the story from the physical market, the fundamentals (as we see them) and IAI data showing growth in production, the bullishness seems to be investment/fund-driven. The question is whether it is CTA-type fund buying because of an upward trend or whether macro funds are turning bullish, which would suggest they see a brighter outlook for China – something that is not showing up in the data yet. Still, we have heard some reports that, with the anti-corruption focus easing and with governments backing loans to local governments, there is some pick-up in infrastructure projects – the situation may be improving.

Conclusion

Aluminium seems to be determined to head higher. Fundamentally, we struggle to be bullish but there’s little point ignoring the price action. Chinese economic data continues to show a loss of momentum so the potential for restocking seems low. Perhaps talk of strategic stock-building, the curbing of excess capacity and the promise of infrastructure spending are fuelling investor interest. On the chart there may still be room for prices to run higher before they hit resistance from the DTL, which is around $1,750.

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