medium · Order Flow Analysis absorption-exhaustion-imbalance
How does 'Open Interest' (OI) help distinguish between a genuine trend and a short-covering rally?
- OI only measures retail speculative activity, so it is best treated as a pure contrarian indicator.
- A genuine rally shows rising price alongside falling Open Interest as existing short positions are closed out.
- A genuine rally shows rising price and rising OI, indicating new long positions are being established.
- Short-covering rallies are always characterized by a sharp, sustained spike in total outstanding Open Interest.
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