OPEN INTEREST . . . as an indicator of bottoms and tops

I was weened in the commodity markets of 1973 . . . there has never been a time before or since of wild futures markets . . . until bitcoin.

One of my early mentors was Larry Williams who wrote about a plethora of indicators, some useful, and some not so useful in his classic How I Made a Million Dollars . . . Last Year Trading Commodities. You can order from the following link to help support this blog.

One indicator I have found to be extremely useful and reliable is William’s view of open interest. Essentially, he looks for an extreme reduction in open interest in a 1–2 day period with support of other bullish indicators for major bottoms and an extreme increase in open interest in a 1–2 day period with support of other bearish indicators for major tops. I have copied from a page of his book showing an example in the 1973 silver market.

A page reprinted from Larry Williams classic book

This one indicator alone is worth the price of the book. Most of his indicators are borderline useful, at least to me. But this one is a gem!

The big issue in the above chart is the large number of shorts which led many top prognosticators, including myself to see a short squeeze. . . . which we got twice!

The first was the during the maintenance at Bitmex that did little to reduce the substantial short positions.

The second is the subsequent rally to over 7100 after we broke through the two week high at 6890. The recent selloff took us back to test the two week high and the secondary selloff in sympathy with the Exthit (pronounced with a lisp and a weak wrist) took us all the way down to 6780. . . before the market roared back with a vengeance.

While the second rally somewhat reduced the large short position, the vast majority of the short position was reduced on the second day (yesterday) of the decline. This has led the bears to argue the short positions are now cleared and the market is now ready to finally begin its sharp decline to under 5,000.

But I do not see it that way. The important thing here is not that the short positions have been liquidated. The important thing is that the total open interest dropped sharply in a two day period. And it is not just the shorts but also the longs! My point is we had a sharp reduction in total open interest in a two day time frame, in a market that took out the two week high, broke substantially under two week high, and has now rallied right back to where we started.

In my view we are in a super bullish area of bitcoin. I do not think we will decline much if at all from here. It looks like the Exthit will put bitcoin in substantial bull market. I have established a substantial long bitcoin position and remain short eth and bCrash.

The interesting thing about this market is that the rallies and dips have allowed skilled traders to establish profitable positions (long and short) with clearly defined and limited risks. . . . again successful trading is not about being right . . . but how you play the game.

My good friend Tone Vays is bearish. I am bullish. That is what makes a market. What we both have in common right now is we are both demanding on our position . . . and that is the key to trading success!

Hope this helps.

UOG

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