The value of open interest figures comes from combining them with both
price movement and data from volume to evaluate the condition of the mar-
ket. If there is a price increase on strong volume and open interest increases,
then this is a signal that there is more buying interest that could mean a
continued trend advance. If prices increase but volume stays relatively flat
or declines and open interest declines, then this reflects a weakening mar-
ket condition. This is considered to be a bearish situation because the com-
bination of rising prices and declining open interest indicates that shorts
are covering by buying back their positions rather than new longs entering
the market. That activity would give a trader a clue that there is a potential
trend reversal coming.
It is important to understand the concept of matching price and trad-
ing activity. If you are watching a continuing long-term trend in a futures
contract, whether the direction is up or down, and prices start to fluctuate
with wider than normal daily swings or ranges–that is, extremely volatile
movements–combined with unusually strong volume and a decline in open
interest, you may be in a climaxing market condition and seeing a clue for
a potential major trend reversal coming.
It appears that bond traders who were short threw in the towel by buy-
ing to cover their positions and that the longs took profits by selling out of
their positions. All of this activity would explain the higher than normal vol-
ume. When the longs liquidated their positions, this was reflected by a de-
cline in open interest.
As for the wild price advance, shorts were bailing out of the market
almost in a panic state of mind, and longs were not willing to sell too cheap,
explaining the upward price behavior. These three characteristics are needed
to complete a climaxing top or bottom. Most volume and open interest
followers watch for this setup as a major sell signal. This condition is ex-
actly what happened to the bonds, producing a truly remarkable textbook
sell signal.
These concepts of volume and open interest can help any trader under-
stand the underlying market condition and the current trend. With that in-
formation, you may decide to buy dips instead of selling intraday rallies.
The fact that the exchanges do not publish open interest data for many
markets until the following day at about noon is a problem for analysts. Es-
timated volume figures are available after the markets close but not the ac-
tual numbers. Most financial papers report the information the day after that.
So it is important to know where to get the information faster than by read-
ing it in the newspaper.