Aluminium saw the battle between technical buyers and producer sellers increase in intensity last week with 3-month metal becoming more volatile as the week wore on. Copper's mini price collapse on Friday came to the aid of the bears but the big-volume struggle still looks set to continue up until December.
Total War
Prior to Friday LME aluminium trading continued to be an interaction of technical short-covering and fresh buying running into heavy producer selling above the $2,800 level.
After being dunked back below that level at the end of the previous week, which 3-month metal closed at $2,787, aluminium gained a renewed foothold above there over Monday and Tuesday.
Producer selling was a constant feature, with the sales being adjusted into 2008 and 2009 and all sorts of fun and games playing out on the market's far forward curve.
It is the fun and games on the nearby December date that have been a key driver in the market's recent rally and the Dec-Jan spread became its own battle-ground last week as players tried to capitalise on the expected monthly index rolls, which serve to increase lending liquidity as long positions are rolled to a forward date.
Heavy-volume lending across the year-end drove the Dec-Jan spread into contango on Wednesday and when this was accompanied by equally heavy lending further down the curve, the London "street" started to sniff danger in the form of one of this market's bigger beasts positioning itself for price weakness.
The result was a rapid sell-off in 3-month metal back down to the key $2,700/2,710 resistance-turned-support level, CTA systematic sellers getting in on the move and lifting again their collective short exposure.
Thursday it was all change as the market held support and bounced back up. Wednesday's sellers covered back just as fast as they had sold on the way down and the move extended all the way up to $2,850 on Friday morning. That placed it within striking distance of the $2,860 level that has been touted for some time as a key target for fresh technical buying. Unsurprisingly, the spread structure retightened with Dec-Jan returning to backwardation.
Just when the bulls looked like they were going to force the market through the producer selling programme and trigger that second wave of technical buying, the copper market slid inelegantly through its key $7,000 support level, unleashing a wave of liquidation and technical selling across all the metals.
For aluminium, it meant a collapse back down to $2,700 and a close at $2,695, a week-to-week loss of $92 and one which has left the short-term horizon obscured until the gun-smoke clears.
Waiting for the Smoke to Clear
The CTAs were probably the single biggest collective victim of the end-week volatility but they seem to have edged out their collective short position to around 7% of potential capacity from just 2% in the middle of last week. Already this morning, there were reports of more selling as they try and capitalise on the break of the $2,700 support level.
But it is the bigger animals of the aluminium market that will likely determine the next move and the nature of Friday's copper-led collapse means it's a little difficult to deduce who has been left with the upper hand both on the nearby December date and further out through the far forwards.
The market remains highly technical in nature with fundamentals not playing a dominant role right now. The gentle downtrend in LME stocks is broadly supportive for the bulls but low cancelled tonnage in the system suggests no imminent rapid acceleration on the downside.
The physical market in Europe is extremely robust, particularly for duty-paid metal, but that should be seen in the context of a noted weakening in the US physical market and early signs from Japan that buyers there are expecting a reduction in quarterly terms for Q1 07 deliveries.
The upside pressure in this market is still focused on the December date with its heav
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