Fundamental and Technical Analysis
Two Approaches
Fundamental analysis studies supply and demand: production, inventories, exports, consumption, weather, government reports, and macroeconomic conditions. It seeks to explain why a price should move. Technical analysis studies price, volume, and open interest to identify trends and timing. Tools include support and resistance, trendlines, moving averages, chart patterns, and momentum indicators.
Open interest helps confirm a trend. Rising price with rising open interest suggests new buying; rising price with falling open interest suggests short covering and a weaker trend. Volume confirms participation but not direction. Fundamentals may be accurate yet early; technical signals may be objective in construction but subjective in interpretation.
Traps
Questions often overstate certainty. Fundamentals do not provide precise timing, and technical analysis is not a guarantee. Do not confuse volume with open interest. A breakout on low volume is suspect. Chart patterns can fail. Also, a market can remain “overbought” or “oversold” longer than expected.
Rule of Thumb
Price up + open interest up = new longs entering, trend confirmation. Price up + open interest down = short covering, weaker signal. Price down + open interest up = new shorts entering. Price down + open interest down = long liquidation.
Worked Example
If a contract rallies from 300 to 320 while open interest rises from 50,000 to 58,000, the move is supported by new positions. If open interest instead falls to 44,000, the rally is more likely short covering and may lack follow-through.