Monday, April 7, 2008

Potential Meanings from Volume and Open Interest Changes

Price Rising, VOLUME dropping and OPEN INTEREST dropping:
Market is running out of traders willing to open or hold an OPEN LONG. Traders are liquidating both loosing short positions and closing winning long positions. A higher probability the market is set to retrace in price lower at some point forward.
Should prices be falling when this scenario develops, the market has a higher probability of a price rise at some point forward.

Price Rising, VOLUME rising and OPEN INTEREST rising:
Market is attracting larger numbers of traders willing to open positions from the long side and hold them. Traders are more confident that prices will continue to climb in favor of a working long. This scenario is a good clue that UPTREND is secure and that the trend may continue further for a period of time.
Should this scenario develop while prices are falling, it is a good indication that DOWNTREND is secure and that the trend may continue for a period of time.

Price Rising, VOLUME dropping and OPEN INTEREST rising:
Market is attracting LATE buyers and EARLY shorts; market is vulnerable to a sharp correction but likely that that correction will be bought creating a buy point for UPTREND.
If this scenario should develop while prices are dropping, it is a good indication that a sharp rally against DOWNTREND will develop creating a sell point for DOWNTREND.

Price Rising, VOLUME rising and OPEN INTEREST falling:
Market has a lot of traders initiating from both sides but larger traders may be liquidating into the higher prices. The market may be vulnerable to large price swings as shorter-timeframe traders attempt to trade from both sides of the market but liquidating before end-of-day. Often a signal of a market turn near-term or continued volatility. More common at significant tops (or bottoms).

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