When constructing achart, the technician plots total volume and total open interest for all

outstanding futures contracts at the bottom of each chart. One specific contract (usually the nearest
to expiration) is used to plot prices. Why, then, use total volume and open interest if only one
specific contract will be traded? The answer lies in the ability to apply the guidelines for a healthy
price trend (i.e., volume and open interest should increase as prices move in the direction of the
major price move).

THEORETICAL BEHAVIOR Figure 5-1 shows the hypothetical plot of the open interest of a single lune
XYZ futures contract. The expiration date for this contract is in lune, two years hence. On the day
before the exchange lists the contract for trading, the open interest in this individual contract month
is zero. When the exchange states it is legal to deal in that particular expiration month, a speculator
and a hedger together make a trade. Open interest slowly begins to increase, but the nu mb er of
open positions in this distant month is relatively low because it is not the lead (nearby) contract.
Assurning the XYZ futures have a quarterly expiration cyc1e, the lune future becomes the lead
month with the arrival of April and May of that expiration year. Open interest in the lune contract
escalates dramatically. In the delivery month, open interest in the lune XYZ future will drop back to
zero; this is true wh ether the contract specifications call for physical delivery or cash settlement. If a
technician tries to measure a single-volume or open interest plot, both variables would be increasing
as the contract became the lead month-no matter what prices were doing. The axiom used to
determine the health of the price trend would not be applicable.