Open interest is an indicator often used by traders to confirm trends and trend reversals for both the futures and options markets. Open interest represents the total number of open contracts on a commodity, meaning one buyer and one seller. Trade volume and open interest is a powerful tool used by traders to predict market trends and it’s my favorite tool to predict future market movement.
Used in conjunction with open interest, volume represents the total number of contracts that have changed hands in a one-day trading session in the commodities or options market. The greater the amount of trading during a market session, the higher the trading volume. The greater the volume, the more we can expect the existing trend to continue rather than reverse.
So now that you have an understanding of what open interest is, I’ll start my story.
It took five weeks to build up 25,000 new longs into the December CME Gold contract, bringing the market above the $1,190 area, with hopes the bottom had been established. Everyone looked for traction to sustain the rally to and beyond the sociological $1,200 dollar level. Then in just one day, half of the new longs got out of their positions and the rally stalled. The effect of that move caused the Gold market to break down below the 200-day moving average, which was $1,174.20 at the time, and the tone had been set.
When this reversal begins, I look to trend lines for support. Trend lines are not just technical, they are also fundamental. What I mean by that is we analyze the physical demand in the marketplace by speaking to dealers, producers, refiners and government mints to determine the demand for product. Now combined with trend lines in the Gold market you can determine how weak the market can become by watching support levels.
If you have been following my previous comments, the $1,150 area and $1,130 area were both levels of support that we had to hold. And as each level was broken thru, we gained momentum to the downside. At the same time we witnessed physical demand fall off a cliff. No surprise.
Weeks ago you might remember the price of December Gold was looking very weak, trading in the $1,114 level. Then the surprise Job Numbers came out and the Gold price rallied 25 dollars in 15 minutes. This is when we started to witness the beginning of the new long taking positions, thinking the bottom had been set. This market too had started some momentum to the upside as you all witnessed to the $1,190 area. As we started to rally, we saw physical demand increase, but not at a level that would make dealers get too excited.
At the time of this report (5am Dallas time), I have to be concerned about the $1,112-$1,114 area in December Gold. We are on the doorstep of the next level of support. In my opinion this is a critical level we have to hold.
If the market fails here, I expect the momentum will gain more speed to the downside.
For those interested in the silver market, we broke thru the $15.31 level of support now and I see no level of support until we reach the magical level of $15 dollars.
On another note, Janet Yellen testifies before the House Financial Services Committee on bank regulation at 10 am Eastern today. Then in the afternoon, New York FED President William Dudley is scheduled to give a news briefing on “Looking Beyond the Macro-Economy.” And FED Vice Chair Stanley Fisher speaks at 7:30 pm on “Central Bank independence” at the National Economists Club. I don’t expect Yellen to give any clues to the direction of the FED today with her carefully prepared speech. But you never know what the Fed governors might say. I expect their comments will be more informative.
That’s it from the Lone Star State. Next comment we hope will be from The Big Apple. Have a wonderful Wednesday.
Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.