Saturday, March 24, 2007

Open interest and intermarket relationships


I'm doing my homework on open interet for options and futures between the stock indices, bond market, and forex market. I found a CBOT headline from last May about how the 2year note hit an all time record in open interest on May 10th, the same date the Dow was at its high for the year. The next day, May 11th, the dow began its correction for the year.






Also noted recently by many blogs such as Tradersfeed and the Vix blog was the extremely high put/call ratio seen in the equities market at the beginning of this last week. I'm sure all the shorts know what happened this week and are starting to look into how open interest and put/call ratios may be a good indicator of where future price may go.

When the fed decided not to cut rates, I should have shorted the spike up in bonds, and played the reversion to mean, because if interest rates are unchanged, then there really is no reason for bonds to be that high just based on a comment of a possible tightening of rates in the future, and the same goes for the pop up seen in JPY. This is another reason why education in bonds, forex, and economics will help me in my trading in understanding the fundamental reasons behind the moves I see in my charts, instead of going on the false assumption that a price movement is because of a technical indicator or trend line.


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