A Primer On Open Interest
The September S&P
futures (SPU and ESU) opened Thursday’s session with a small 0.75
point gap to the upside after the futures yawned at the earlier news that Q2
Productivity was higher than expected, and that the 4-week average for Jobless
Claims had finally fallen under 400,000. The higher Productivity number was a
divided street, given the fact that a higher number could be seen as an excuse
for employers not to hire new workers and prolong the jobless recovery. Locals
were sellers off the open, pushing the contract down to the overnight Globex low
at 962.
First Chicago was a good player on both sides of
the market after news that Wholesale Inventories remained steady produced a
knee-jerk back down to test the low of the session. The futures managed to post
a higher low double-bottom and was done with those levels for the day. The
remainder of the session could be called a “cup and handle” day, with at least 3
of the patterns presenting themselves. R1 resistance at 974 was a tough nut to
crack until the equities market closed. Locals finally succeeded in pushing the
contract through resistance before stopping at Wednesday’s high of 975.
The September S&P 500 futures closed Thursday’s
session with a gain of +9.50 points, and finished just off the high of the day.
Volume in the September ES was estimated at 636,000 contracts, which was short
of Wednesday’s pace but still average. On a daily basis, the contract reversed
off the inverted hammer, but posted an inside day with a closing right into
previously broken trading range resistance. Something that may help to break
back through resistance is buy-side divergence (see chart).
On an intraday basis, the contract has broken the
neckline of a 60-min inverted head and shoulders that measures up to the 980-85
area (see chart).
Starting on Friday, there is absolutely nothing
on the economic calendar for 3 days, until the FOMC meeting on Tuesday. Always
remember the market will be there on Monday, so enjoy your weekend!
What Is Open Interest?
The number of contracts that are in existence at
any given time is referred to as “open interest.” So, since for every buyer
there is a seller, and vice versa, if I’ve sold short 5 contracts, and you’ve
bought 5 contracts, what is the open interest? Very simple. It’s 5 contracts.
What concerns us, however, is not so much the level of open interest but the
patterns of change. For that purpose, we can define the 4 types of participants
in the market:
1. Old bulls who have already bought and are
holding long positions.
2. Old bears who have already sold, and are
holding short positions.
3. New bulls who are looking to buy or in the
process of buying now.
4. New bears who are looking to short or are in
the process of shorting.
In a bullish market, when an increase in open
interest is accompanied by higher prices, it means that new buyers are
continuing to enter the market. They are still willing to keep paying higher
prices, so continued strength can be expected. When prices are still advancing
but the open interest begins to go down, it means that new buying has stopped
and that the buying being done is primarily by old bears who are exiting the
market by covering their short positions. Meanwhile, the old bulls who held
long positions are liquidating and taking profits. So, price advancing but open
interest declining is a signal that the price trend may be getting ready to
reverse. After an uptrend has been underway for awhile, open interest must be
viewed in a different light. If the level of open interest is extremely high,
it indicates that there has been large public participation and that the market
may be vulnerable. There are probably few buyers left on the sidelines who have
not already bought and so there is little chance that open interest will
continue to increase.
In a bearish market, if prices are falling and
open interest is increasing, it means that new bears are entering the market to
sell short and should continue to push prices lower. But when the open interest
stops increasing, or begins to decline, it is a sign that the new bears are no
longer willing to short at these lower prices. The selling that is taking
places is primarily old bulls who are liquidating their long positions, and an
indication that the downward price movement may be coming to an end.
It is best not to try to interpret changes in
open interest on a day-to-day basis. It’s much more meaningful to watch for
changes lasting from several days to several weeks.
Daily Pivots for 8-8-03
|
Symbol |
High |
Low |
Close |
Pivot |
R1 |
R2 |
R3 |
S1 |
S2 |
S3 |
| COMP |
1658.43 |
1641.74 |
1652.21 |
1650.79 |
1659.85 |
1667.48 |
1676.54 |
1643.16 |
1634.10 |
1626.47 |
| INDU |
9135.00 |
9031.14 |
9126.45 |
9097.53 |
9163.92 |
9201.39 |
9267.78 |
9060.06 |
8993.67 |
8956.20 |
| NDX |
1225.29 |
1208.74 |
1208.74 |
1214.26 |
1219.77 |
1230.81 |
1236.32 |
1203.22 |
1197.71 |
1186.67 |
| SPX |
974.89 |
963.82 |
974.12 |
970.94 |
978.07 |
982.01 |
989.14 |
967.00 |
959.87 |
955.93 |
| ESU |
975.25 |
962.00 |
974.50 |
970.58 |
979.17 |
983.83 |
992.42 |
965.92 |
957.33 |
952.67 |
| SPU |
975.00 |
962.00 |
974.50 |
970.50 |
979.00 |
983.50 |
992.00 |
966.00 |
957.50 |
953.00 |
| NDU |
1227.00 |
1208.50 |
1219.50 |
1218.33 |
1228.17 |
1236.83 |
1246.67 |
1209.67 |
1199.83 |
1191.17 |
| NQU |
1227.00 |
1208.50 |
1219.50 |
1218.33 |
1228.17 |
1236.83 |
1246.67 |
1209.67 |
1199.83 |
1191.17 |
| BKX |
871.43 |
856.50 |
870.86 |
866.26 |
876.03 |
881.19 |
890.96 |
861.10 |
851.33 |
846.17 |
| SOX |
385.13 |
378.30 |
380.53 |
381.32 |
384.34 |
388.15 |
391.17 |
377.51 |
374.49 |
370.68 |
| DIA |
91.55 |
90.43 |
91.55 |
91.18 |
91.92 |
92.30 |
93.04 |
90.80 |
90.06 |
89.68 |
| QQQ |
30.51 |
30.02 |
30.31 |
30.28 |
30.54 |
30.77 |
31.03 |
30.05 |
29.79 |
29.56 |
| SPY |
98.07 |
96.76 |
98 |
97.61 |
98.46 |
98.92 |
99.77 |
97.15 |
96.30 |
95.84 |
| SMH |
31.72 |
31.17 |
31.38 |
31.42 |
31.68 |
31.97 |
32.23 |
31.13 |
30.87 |
30.58 |
Fair Value & Program Levels
Fair Value — (0.84)
Buy Premium — 0.02
Sell Discount — (2.58)
Closing Premium – (0.44)
Please feel free to email me with any questions
you might have, and good luck with your trading on Friday!
P.S. Learn to trade the E-minis in my new
interactive CD-ROM training module! Click
here for details.