Saturday, December 15th (Weekend Update)
I want to bring your attention to something you probably didn't notice on Friday. Open interest in Nasdaq futures ballooned nearly 10% during Thursday's selloff, surging from 72,300 to 79,000. It's highly unusual to see open interest in the NDX futures make such a big leap, and when it does happen it indicates a large amount of new positions are being initiated. What's important to note is which direction the Nasdaq closes on such a day. If it closes lower, as it did on Thursday, then it's a pretty good bet the market will continue lower over the next 2-3 days. Similarly, if it closes higher, a rally over the next 2-3 days is probable. Why? It seems that when new positions are initiated at this heavy a clip, there's follow through over the next couple of days. To illustrate, I've listed all occurrences since 1998 when Nasdaq futures open interest jumped by 10% or more, along with how the NDX closed that day (see table below). Notice that in every case there was follow through in the same direction over the next 2-3 days. Now technically we only saw a 9.2% jump in open interest on Thursday, but to me that's close enough. Accordingly, because Thursday was a sharp down day, it looks like we should see follow through on the downside early this week, with a close below NDX 1601 either Monday or Tuesday.
Historical Surges in NDX futures open interest
09/18/01 +20% on dn day...NDX down 3 days later
09/17/01 +15% on dn day...NDX down 3 days later
03/08/00 +13% on up day...NDX up 2 days later
02/24/00 +14% on up day...NDX up 3 days later
11/18/99 +12% on up day...NDX up 2 days later
06/10/99 +11% on dn day...NDX down 3 days later
03/05/99 +15% on up day...NDX up 3 days later
01/28/99 +22% on up day...NDX up 2 days later
10/14/98 +12% on up day...NDX up 3 days later
05/29/98 +11% on dn day...NDX down 3 days later
03/31/98 +11% on up day...NDX up 3 days later
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