Hi AW10 / Murtaza,
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Scorpio, scope of your chart is limited to NF and Futures OI. The rules for reading futures OI are quite straight forward... (I am sure u already know it, but still posting those rules for the benefit of others)..
There are 2 dimension to reading futures OI.. one is direction of price move to give us bullish or bearish interpretation.. and second is rise or fall in OI telling us whether new money is entering the mkt OR existing money is leaving the mkt. So if we put these two togather then we are in better position to know if the trend shown by price is supported by new money i.e has stregth.. or not it lacks the strength.
Standard rules are
1) prices rising + total open interest increases, => new money is flowing into the market reflecting aggressive buying, and is considered bullish
2) prices are rising + open interest is declining==> money is leaving the market i.e people are closing their prev trade and closing the trades hence the rally is primarily a result of short covering
3) prices are declining + open interest rises ==> new money is flowing into the market, reflecting aggressive new short selling i.e. bearish
4) Prices are declining + open interest declining ==> the price decline is being caused by losing longs being forced to liquidate their positions i.e long covering.
Now with this background let me interpret the chart posted by you.
Posting the Nifty chart for the last two sessions. Key points:
1. Falls are in larger volumes than rises
2. OI is tracking Nifty ie rise with Rise in nifty and Fall with every drop except
3. last half hour today shows negative co-relation
What does one read from this observation? Is this simply the "weekend no carry over" 's squaring off or more?
Regards,
Scorpio
As you have mentioned, on majority of time, trend of OI is in sync with the NF direction. This is more obvious during the day. Near the end of the day, geneally Daytraders will windup their position so we will see drop in OI and rise in price.. i.e. divergence.. which u can around 3.00pm on both days.
On 4th, this divergence was much bigger and lasted for longer time.. i.e. obviously more traders came out from indicision shown by the mkt.. and reduced their weekend risk. There traders might have carried position on 3rd night.
As 3rd/4th was quite narrow days 80 points range compared to average of 100 points range.. I interpret it as that there was low participation of big smart players.. so most of the action was by day or swing traders or small smart money.
During the day, u might see this divergence in price and OI direction as advance indication of what is going to come.. observe the continuous increase in OI on 3rd between 13:00 to 14:00 when price was falling. There was high vol bar at 13:00. where bear have absorbed the demand (as per VSA concept).. And then price never crossed the high of this bar. This divergence was signal for the drop from lower High around 14:00.
This is how I will read this chart and interpret OI/volume/Price..Hope this helps.
Happy Trading
