It was copper that set the overall tone for all the LME metals last week, negative sentiment in the red metal washing across the whole complex. Copper's breach of the key $7,000 per tonne support level the previous Friday appeared to be the trigger for a sustained attack on all the major metals by technical traders and systematic funds. Aluminium initially weathered the storm well but as the bears became emboldened—helped by the dissipation of the nearby market tightness--it ended Friday looking battered and bruised.
Technical Bears Bite Back
Monday was a day of heavy-volume carnage across the complex with everything taking its cue from events in copper. Aluminium already looked vulnerable having been dragged down through the $2,700 level in the previous Friday's sell-off for a close at $2,695.
Monday brought a second wave of technical and fund selling which sent 3-month aluminium reeling down through interim support to $2,615 at the end of the morning. London traders were steeling themselves for another burst of selling once the US opened but when it didn't materialise as expected, copper and aluminium executed vicious U-turns.
The light metal made it all the way back to $2,714 at the close, although importantly copper didn't make it back above its key $7,000 level, paving the way for what was to come later.
Tuesday was a neat reversal of Monday with the markets consolidating in the morning session only to succumb to renewed fund pressure once the sun rose over the New York skyline. Aluminium was forced to surrender anew the $2,700 level to $2,686 at the close but the selling pressure was noticeably lower-volume, confirming fund-watchers' suspicions that these bouts of CTA-led activity tend to come over a three-day period.
Wednesday and Thursday were the lull in the storm with the light metal oscillating either side of $2,700 in nervous conditions with the London "street" recovering from the whip-saw action of the previous couple of days. Support was coming from consumer pricing and resistance from bouts of more fund selling whenever the market looked like trying to move up and away from $2,700.
Copper's failure to regain the $7,000 level came back to haunt it on Friday with another bear attack. Aluminium got sucked into the action again and this time fared badly, the lurch to $2,566 compromising both the 100-day and 200-day moving averages and testing a key Fibonacci level (more on this in the technical commentary below from our title sponsors at Sucden UK).
It was saved at the bell by the usual week-end buy-backs from the short-term brigade and managed to haul itself back up to $2,625 at the close. But it was a week-to-week loss of $70—the third consecutive weekly loss, over which time the light metal has lost $183.
As with copper, the immediate culprits seem to be the CTA fund community, who had been forced to cover their collective short position almost entirely over the previous few weeks. Over the course of the last six trading days they were on the sell button again and our sources suggest their collective short exposure went from 2% of potential capacity on Thursday, Nov 9, to over 20% by the end of last week.
One of the key factors allowing them to do so has been the evaporation of tightness around the December date. Remember it was the big open interest on futures and particularly call options here that sucked the light metal up above $2,800 early this month as shorts, both funds and option market-makers, were forced to cover.
When that covering momentum was at its peak in late October the Dec-Jan spread was valued at $27 backwardation. As of last Friday it was $8 contango and the impact has rippled throughout the nearby structure. Cash-3s ended the week valued at $25 contango, compared with $12 backwardation on Oct 30.
Divergences
For now the December panic appears to have gone, although the way the short-term momentum funds are piling back in on the short side looks to us to be an
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