are in charge. They are adding to positions and making the money, thus
becoming more powerful. Shorts are also being stopped out, but new
sellers are taking their place. As the market continues to rise, the longs get
stronger and the shorts get weaker.
2. If prices are in a downtrend and OI is rising, this is a bearish sign. The bears
are in charge in this case. They are adding to their positions, and they are
the ones making the money. Weaker longs are being stopped out, but new
buyers are taking their place. As the market continues to fall, the shorts get
stronger and the longs get weaker. Another way to look at the first two
rules is that, as long as the OI is increasing in a major trend, it will have the
necessary financing to draw upon and prosper.
3. If prices are in an uptrend and OI is falling, this is a bearish sign. The old
longs, the smart money (I call them “smart money” because they have been
right to this point), are taking profits and liquidating. They are replaced by
some new buyers who will not be as strong on balance, but the declining
OI is an indication that the weak shorts are also bailing. They will be
replaced to some extent by new shorts that are stronger than the old shorts
were.
4. If prices are in a downtrend and OI is falling, this is a bullish sign—the
mirror image of Rule 3. The smart money, the shorts, are covering or
liquidating. They will be replaced to a degree by new shorts that are not as
strong as they were, but the declining OI indicates that the weakened longs
are largely throwing in the towel. They will be replaced by fresh longs that
were not as weakened by the lower prices. Another way to look at Rules 3
and 4 is that when the pool of losers is depleted, the party will be over.
5. If prices are in a congestion range and OI is rising, this is a bearish sign.
The reason is that the public generally plays the long side. Rising OI in a
trading range affair assumes that the commercials and professionals are
taking the short side, and the uniformed public will most likely lose out in
the end.
6. If prices are in a congestion range and OI is falling, this is a bullish sign.
The reason is that the professionals, who are more likely to be short, are
covering. The weak hands are throwing in the towel.
