London 09/06/2016 - Aluminium was whippy in Thursday LME trading - a foray above $1,600 thanks to fund buying quickly ran out of steam due a lack of follow-through.
The metal hit fresh one-month highs of $1,623 before succumbing to selling pressure - it ended $27 lower than Wednesday's close at $1,577 per tonne.
"We purchased a lot of aluminium yesterday and it kept going up, which was great. But then it came back down again and that's not so much fun now we are long," a trader said.
Volumes were impressive at more than 16,000 lots given China's absence from the market for a national holiday.
"It has got a bit choppy - merchants opened up to sell and found that there is no one there - but it's nice to have a bit of movement," a second added. "Traders like volatility - they don't like flat trading. I hope it is not just a flash in the pan."
Funds have more cash on hand from investors, providing the momentum for today's move, although a lack of end-user demand in any over-supplied market meant the metal failed to hold onto gains.
"The funds are awake again, which is promising because they are buying a lot of ali, but there are still concerns about oversupply," the trader said.
Analysts attending a conference in Chicago estimated on Wednesday there are around 15 million tonnes of aluminium available globally, considerably higher than previous consensus of 10 million tonnes.
"I'm a bit cautious of prospects for additional upside in aluminium - $1,580 looked pretty firm and the market seemed happy to sell any time we approached this level," Kash Kamal at Sucden said.
"We could well see some consolidation around here for a while, testing appetite on any dips, but given the bearish fundamentals we could quickly see prices unwind and the action settle back into the range that has dominated May/early-June trading," he added.
Still, there are some positive signals - there was a small increase in long positions last week, the LME's most recent commitment of trade report (COTR) showed. Total short exposure fell to 136,000 lots from 142,000 lots, Triland said.
"It was encouraging for bulls to see solid buying from both funds and trade clients. It implies a solid base under the market," the broker noted.
As well, the metal has risen considerably from the 2009 lows hit in January of $1,449 and an improving technical picture raises the likelihood that traders will rebuild their long positions while momentum is positive, FastMarkets analyst Boris Mikanikrezai said.
"The metals are slowly grinding up," the second trader said. "We are not in a bull market but we are sideways with an upside basis."
This can become a self-perpetuating move - short position holders will be increasingly compelled to cover, pushing prices higher.
"The physical traders do not believe things will improve as they are not seeing a lot of buying - but this is when things can turn around," the second trader said.
"No one believes the bullish story and so when it moves up and then corrects lower they think that is the end of that," he added. "But then it moves again and all of a sudden the percentage of increases are higher and those who are short or are unhedged are in trouble - then it is game on."
As well, last month's price rise encouraged producers to move large volumes of metal onto the market, which met demand from the funds, the second trader pointed out
"But if we get to around $1,650-1,700 again, they may be less keen to sell as they may get even higher prices," he added.
(Editing by Mark Shaw)