Fundamental AnalysisSwing & Position TradingTechnical Analysis

Open Interest and Market Bottoms

Open interest is without a doubt the least used bit of market data by chart watchers. Conventional wisdom; prices up on increasing O.I. being bullish, is just as often found to be bearish.

What I want to show here is the relationship of O.I. and the buying patterns of the Commercials for the Commitment of Traders (COT) report.

I?ll begin by showing a chart of gold with an indicator I?m sure you have never seen before, a 13 week stochastics of just Open Interest. Yes, this index is simply an oscillator of O.I. What we see is that, generally speaking, low levels in this index are found at market bottoms.

Thinking about it makes sense as what it is telling us is there is little interest, open or not, in the market we are stydying. I have marked off every time the index fell below 10% on the chart, admittedly this was ?chosen? on a best fit basis.

We also see there are times the O.I. measure is low and the price of Gold does not rally, it is at a top and declines. Can this be rectified?

Yes and here?s how. The next chart is of the same time period, only this time I have placed a 26 week stochastics of the net Commercial position. For a moment let?s focus on just this index.

High readings tell us the Commercials, producers and users or hedgers, have been doing more buying than selling. Typically prices rally following such readings, but not always; this business is just not that easy.

We can, though, think of a bullish condition by imagining a time when the Commercials have been doing a great deal of buying—that usually means a low, while at the same time Open Interest has dropped—which also usually means a low.

This is a somewhat rare condition, but one to be on the lookout for. The essences of the numbers are saying something like this;

No one is interested in this market (low O.I.)
No one but the smart guys (high Commercial readings)

What a double dose of bullishness this should be, and in fact the charts prove the point.

Here we see the results; note how on the middle of 2002 O.I., the blue line, was at a very low reading while at the same time the red line, Commercial buying, was high telling us that the only ?player? in the game were the big guys and their action was on the long side.

Again in the middle of 2003 O.I. dropped to next to nothing, while the Commercials became heavy buyers and Gold began to glitter.

At the end of 2004 the opposite condition set up, low O.I. and a large short position by the commercials, shortly thereafter Gold broke down. And on it goes, study the chart and you will see we have a nice ?set up? for rally when ?no one wants to buy? except the commercials.

SOYBEANS—The first chart here shows just the O.I. indicator where again we see low readings as most likely found at the start of important upside moves. This is perhaps the ultimate contrary opinion indicator, an and indicator we have not put to full use

Now lets look at times we have the double whammy effect of Commercials buying and Open Interest low.

Now we can see the set ups I have spoken of and as you see the presented a trader with numerous major moves. Do not think this is a timing tool or technique, at least that?s not the way I use it. To me this is all about getting a market set up?or ready—to move to the upside.

THE DOLLAR INDEX

Again we see the familiar pattern of low O.I. being bullish, but not always. We saw high O.I. readings just before prices declined in early 2005 and then again later in the year. This tells us to be careful, we cannot bank, or trade on this pattern alone, that we cam do better by seeing who the buyers are at these time of little attention.

The next chart shows the addition of the Commercial index as a guide to confirm the possible bullish set ups suggested by O.I.

SELLING SHORT—-

Finally we can look at the exact opposite?high readings in Open Interest and low or bearish readings from the Commercials. We saw how effective that was in soybeans and the same pattern is seen here.

It makes sense?after all we have an insight into what real people are doing with real money, not some mystic number or invisible line reaching through space. What we have here is a time of great attention to the market?hence the high Open Interest reading. But the attention or buying is not being done by the smart, commercial money. Instead the rally or buying has been from trend followers and the public, hence a market top usually unfolds and usually more quickly than expected.

For more than 40 years I’ve banged away at the markets, everything from stocks to bellies to writing calls, even to cornering the sugar market years ago. Day in and day out, I trade.I have an unquenchable thirst for the markets: short term trading, position trading, trading stocks, commodities, futures... you name it. My hard work, countless hours of research, and years of trading have paid off in spades. I have made millions from my own personal trading.In 1973 I wrote the best selling book, “How I Made A Million Trading Commodities”. In 1987 I took $10,000 to $1.1 million in the most widely publicized real time trading championship out there. No one has ever come close to surpassing my record year 11,000% return. In 1997 I taught my 16 year old daughter to trade and she became the second all time winner... and I made another million that year myself.I’ve traded my own money live in foreign markets at seminars held in Russia, China, Japan, Germany, Australia, Singapore, and other countries. Unlike just about everyone else out there, I really have made millions from my own personal short term trading. More importantly though, I have taught others to do the same.Numerous students of mine have gone on to to win that same prestigious trading championship, manage funds, or become successful advisors or personal short term traders. Not all have succeeded, this business of trading stocks, futures and commodities is tough and is not for everyone.You may have already come across several of my contributions to the financial world; like the indicator Williams %R, or one of my many best selling books on trading and investing, or perhaps you have seen the professional awards I have been fortunate enough to be given. Regardless, my work is widely available and useful to many.My tools of trading and new breakthroughs in trading have also been published in magazines such as Active Trader, Futures Magazine, and Technical Analysis of Stocks & Commodities. My research and writing are continuous. I've also been featured in Barron's, The Wall Street Journal, Forbes, Fortune, and Vanity Fair. I am one of the most widely quoted and followed advisors. I've been interviewed on television numerous times: CNBC's Power Lunch and Wake-Up Call, Bloomberg Television, CNN-Financial, and Neil Cavuto's show on FOX News. I have a sound reputation in the financial world when it comes to short term trading and investing. I have always enjoyed sharing my knowledge with other traders and am ready to help you get started. Whether you are brand new to short term trading or an accomplished trader, I think you can learn from me. I'm the real deal.

For more than 40 years I’ve banged away at the markets, everything from stocks to bellies to writing calls, even to cornering the sugar market years ...

jessechan

Member
58 1
A new way of looking O.I. By the way, Larry, will there be any new futures trading book coming in the near future?
 

darktone

Veteren member
3,916 1,000
I enjoyed reading that.

Sentiment!!!!... Hardly talked about, yet so important imo.
 

Jennjam

Newbie
5 0
I find OI very important in trading Fx as its the only reliable source of volume unless you are a bank.
 

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