•••• COLUMN
Safex Scenarios with Susari
SUSARI GELDENHUYS
38
INTRODUCTION South African grain prices are known to be very volatile due to uncertainty about the future of the grain market . Future stock levels , imports , hectares planted and yields are but a few of the factors that create uncertainty ( and therefore price volatility ) in the market . The recent change of the old season with low stock levels to the new season with more favourable production expectations , is proof thereof . Due to these volatile conditions , good hedging and investment decisions are difficult for all market participants . However , there are two general aids in the form of fundamental analysis and technical analysis which will contribute to a higher probability of success when such decisions are considered .
Fundamental analysis and the basis of technical analysis were discussed in previous articles . The previous few articles focused on the utilisation of various instruments in technical analyses in order to make certain decisions . As a rule most of the technical indicators can be interpreted more accurately in conjunction with the interpretation of trading volumes and open interest as indicator . The article below focuses on the utilisation of open interest as technical instrument .
OPEN INTEREST Open interest can be defined
OCT / NOV 2017 • SENWES Scenario
as the total number of open contracts relating to a specific commodity . It can be seen as an indication of the interest of market participants in the market . Open interest is used mainly in the futures market , which includes the option market . The figure can get lost as market participants focus on the many other available technical indicators , despite the important information which open interest offers as technical indicator .
IMPORTANCE OF OPEN INTEREST As already indicated , a contract is concluded by a buyer and a seller . The open interest figure represents the number of contracts which are open at the end of a specific trading session . Open interest is determined by the total number of buyers / sellers in the market and not by the sum total of the buyers and sellers . Therefore , should both the buyer and seller of the contract be new entrants to the market , the open interest figure will increase by one . The figure will decrease by one should both the buyer and seller exit the market . Should a buyer ( seller ) exit the market and should the seller ( buyer ) access the market , open interest will remain unchanged .
An increase in open interest means that new money flows into the market , which means that the current primary trend will continue . The opposite is true in respect of a decrease in open interest , which means that contracts are liquidated and cash is taken out of the market . It also indicates a termination of the current trend . Open interest can therefore be seen as a leading indicator of a possible trend change .
CONCLUSION By merely having a reasonable understanding of the above information , you will be a step ahead of the rest . However , it will be most beneficial to combine technical analysis with fundamental analysis in order to make the best possible decision . When the longer term support or resistance line is broken , it can usually be linked to fundamentally changing supply and demand factors .
Technical price graphs offer analysts the opportunity of visually representing the ratio between supply and demand and possible changes in the ratio can be indicated by various price indicators . The next article will focus on the interpretation of the interaction between price , volume and open interest as a combination .
For more information or to obtain competitive option prices on a large variety of commodities , please contact Susari Geldenhuys at 018 464 7430 or 072 116 9999 or e-mail her at Susari . Geldenhuys @ senwes . co . za .