ALUMINIUM TODAY: Continues to defy gravity

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1,981 Mar 30 high
R2 2,000 Psychological resistance
Support:
S1 1,915 20 DMA
S2 1,886 50 DMA
Stochastics:
Legend:

BB – Bollinger band

DMA – daily moving average

DTL – downtrend line

Fibo – Fibonacci retracement level

H&S – head-and-shoulder(s) pattern

RL – resistance line

RSI – relative strength index

SL – support line

UTL – uptrend line

Technical Comment

Analysis

  • Having found the technical support at the 38.2% Fibo of the January low-March 1 high at $1,850.10 per tonne, aluminium has rebounded higher.
  • Its robust price action has made the light metal as one of the best performers in the complex.
  • It registered a fresh 2017 high on March 30 at $1,981.00 per tonne, eroding the psychological overhead resistance at $2,000 per tonne.
  • Aluminium prices continue to trend higher despite running a negative divergence on its daily RSI.
  • As well, its stochastic lines have completed a bearish cross-over and recently started to tread lower. Build-up in the selling momentum is likely to drag both the fast and slow line to decline further.
  • Given the mild pullback and decent dip-buying interest, aluminium’s technical backdrop remains supportive for the metal to advance higher.

Macro drivers

Money managers remain friendly towards the light metal, increasing their bullish exposure by 11,594 lots as of March 24 while 4,366 lots of selling failed to offset it. This allowed aluminium’s net long fund position (NLFP) to register a fresh 2017 high at 194,479 lots, a record high. As the price advances higher, trend-following money managers are likely to continue adding while the build-up in gross short positions may even trigger a short-covering rally.

Aluminium stocks are destined to end the first trading quarter lower. Total net inflow in March was 2,975 tonnes, significantly lower compared to the outflow of 314,075 tonnes. Cancelled warrants remain elevated after briefly dipping in mid-March, after a total of 168,700 tonnes in the short space of three days was allocated for removal, and ended the month at 873,325 tonnes. Consequently, available stocks took the greatest hit after they declined by around 23% to 1 million tonnes from 1.30 million tonnes. With available inventories tightening, prices should remain supportive and reflect why it has persistently been an uptrend.

However, the cash/three-month spread has not showed any sign of tightening yet. With the April contract dominated by longs, with four entities collectively holding 25% of the open interest, it is sufficient to cover shorts that wish to roll-over their position. Cash/threes remain in contango, having eased to $10.25 from $10.00 despite the presence of a dominant warrant holder holding 40-49% of the available warrants.

North American primary aluminium deficit is expected to grow to around 3.5 million tonnes in 2017. This underpins physical premiums in this region and has kept it near the high at 9.5-10 cents per lb. Furthermore, MJP premiums settled 35% higher in Q2, which has provided a bullish backdrop for premiums in the region to edge higher. Meanwhile, no deals were reported in Europe but spot demand has been quite decent, with consumers booked up on long-term contracts. 

Conclusion

Growing tightness in available inventories and strong physical premiums, backed by robust buying interest from money managers are likely to keep aluminium on course to advance higher. Taking out the next overhead resistance should be a matter of when and not if. But large off-market stocks and potential profit-taking are likely to dog the market and perhaps put the recent bullishness under pressure. It may need a strong trigger but without a price confirmation, we will remain cautiously bullish towards aluminium for now.

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