Interpretation of open interest in futures

The rules for interpreting open interest changes are similar to those for volume, but require additional explanation.

1. With prices advancing in an uptrend and total open interest increasing, new money is flowing into the market reflecting aggressive new buying, and is considered bullish.

2. If, however, prices are rising and open interest declines, the rally is being caused primarily by short covering (holders of losing short positions being forced to cover those positions). Money is leaving rather; than entering the market. This action is considered bearish because the uptrend will probably run out of steam once the necessary short covering has been completed.

3. With prices in a downtrend and open interest rising, the technician knows that new money is flowing into the market, reflecting aggressive new short selling. This action increases the odds that the downtrend will continue and is considered bearish.

4. If, however, total open interest is declining along with declining prices, the price decline is being caused by discouraged or losing longs being forced to liquidate their positions. This action is believed to indicate a strengthening technical situation because the downtrend will probably end once open interest has declined sufficiently to show that most losing longs have completed their selling.

Let's summarize these four points:

1. Rising open interest in an uptrend is bullish.

2. Declining open interest in an uptrend is bearish.

3. Rising open interest in a downtrend is bearish.

4. Declining open interest in a downtrend is bullish.