So this was posted in the other 'oil' thread:
The most important figure to look at is the total Open Interest. That means how many contracts have been written between the buyers and the sellers for that week. When the price of oil, is going up then the producers will be selling more as the buyers can see the price is going up, so they want to buy more at the lower price. This is when you will see a lot of OI (contracts). However when the price is falling the buyers buy less because they are waiting for a better price, therefore as the OI falls, it tells you fewer contracts will be opened.
So the important thing to look out for are Open Interest Orders falling or rising. Where you see short sellers they tend to be the suppliers who are selling their wares to those who are going long, the buyers. You must have a buyer to equal a seller. It is a two sided contract.
Open interest [OI] is the total number of open contracts at the close of trading. That is the total number of contracts long or short, not the COMBINED total.
Futures contracts are zero sum. This means that each contract [OI] must have a buyer and a seller. OI will increase by 1 when a new buyer buys from a new seller. There must be a new position for OI to increase.
OI will decrease by 1 when an existing long [who liquidates] sells to an existing short [who covers].
Any transaction that involves one existing and one new participant has NO EFFECT on the OI interest.
So OI is a volume indicator. However, unlike a volume indicator, it tells you whether the volume is very bearish or very bullish, or simply meh. The 'VERY' is calculated against the highest volume and the lowest volume of the last 3 years as a %.
This information is contained in the COT chart that I post. The tug of war predominantly exists between the commercials, who are charted and the big Funds, who can also be charted, but do not show on the posted chart. They are the raw number that I post.
The third number that is obviously important is the actual commodity price.
Last week, as the numbers are all lagging on the COT, we have had a situation where the commercials have been buying circa 90% of their highest historical volumes and price has declined [albeit more slowly last week] in the face of this commercial buying. This is due to the very high Fund shorting.
Funds [tend to be] are momentum traders. The algorithms jump on trends reinforcing them until they end and then [potentially] reverse or cover.
This weeks number [last week in reality] was an increase of SHORT OI. This explains last weeks decline.
However, for whatever [unknown] reason, this number very often persists into the current week. Of course it is far from infallible, but it is regular enough to use it [along with other variables] as a trading signal.
jog on
duc