Tuesday, July 27, 2010

Clues from open interest and prices


may




june




july




spot

next



spot

next



spot

next


31/5

0

14466

14466

30/6

0

14449

14449

30/7




27/5

14250

12604

26854

29/6

8920

13322

22242

29/7




26/5

18642

8662

27304

28/6

10783

9240

20023

28/7




25/5

20135

5331

25466

25/6

14523

6517

21040

27/7




24/5

20059

3277

22336

24/6

16443

2483

18926

26/7

21304

5077

26381

21/5

20251

2301

22552

23/6

16946

1304

18250

23/7

19580

2110

21690

20/5

20866

2061

22927

22/6

19890

1055

20945

22/7

19539

1600

21139


As a futures technical trader, we are studying the market in 3 aspects which includes price, volume and open interest. Out of these 3, price is most important, however, volume and open interest did provide another confirmation on the price action and indication of changes of trend. By studying volume and open interest, it can serve as an alarm when we are too comfortable in riding the trend.

I am quite particular on open interest of our market because with the massive increase in open interest, the market only able to move significantly in 1 direction rather than in range. On 26/7/2010, the open interest was increasing 21.5% from 21690 to 26381 after successful breaking the resistance at 1350. Increasing in open interest only can bring meaning that more buyers come in and they feel the market able to go higher again in the future. On the hand, it also represent more sellers come into the market by judging any price above 1350 is a good price to short cause they carrying bearish view on the market. Open interest alone can’t give too much information on market direction, however, it is different story when it combine with utilization of price changes.

According to “Trading for a Living” from Elder Alexander, when open interest increase during a rally, it confirms the uptrend and give signal that it is safe to add long positions due to more sellers are coming into the market. When sellers can’t withstand the pressure of their losing position become wider and wider, soon they will close their position and their short covering is likely to push the price higher. Until a point where open interest goes flat during a rally, it warns the uptrend is getting old and best gains have been made and it is advisable to avoid go in any long position. When open interest falls during a rally, it shows both winners and losers are getting profit and cutting losses respectively, and the uptrend is ready reverse so it is time to goes short. In addition, when open interest increase during a trading range, it is a bearish sign because commercial hedgers and savvy institutions are more likely to sell short than speculators and making the prices couldn’t go up.

So our market was in the 1st situation or 4th situation? It is too bad that I don’t have any data to doiback testing on connection between prices and open interest, or else I can obtain another useful tool in identifying the market direction. So now our market was moving between 1350 and 1360, and it is still safe for long position as long our cash market didn’t close below 1350.


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