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Why Overnight Market Moves Are So Misleading

Published 10/07/2021, 12:40 AM
Updated 07/09/2023, 06:31 AM

S&P 500 Index Daily Chart

Wednesday’s resilient price action shows overnight traders don’t have a clue what they’re doing. The S&P 500 opened Wednesday’s session by gapping down nearly 1%. But those opening levels were as bad as it got and prices rallied nicely through the day. So much for all the death and destruction the futures market predicted a few hours earlier.

The problem with overnight markets is their thin volume allows them to be dominated by emotional retail traders. There is no way institutional investors can find the number of buyers and sellers they need to move their huge positions. That leaves basement dwellers and overseas speculators in control of a market they clearly don’t understand.

While these small traders can influence the open like they did Wednesday morning, when institutional investors show up for regular hours trade, they don’t give a hoot what overnight traders were doing. Instead, most of the time they go back to doing what they were doing the day before, which in this case was buying the bounce.

The best thing we can do if we find ourselves on the wrong side of an opening gap is to keep our cool. Often big overnight gaps reverse within hours. This is exactly what happened Wednesday when the daily low was within an hour of the open and the index rallied through the day, ultimately finished 1.5% above those early doom and gloom levels.

And this strategy isn’t just for protecting existing positions, if we have cash on hand, buy the early bounce with a stop under the early lows and enjoy the ride. If it doesn’t work out, no problem, get out near your entry point and wait for the next bounce.

As for what comes next for the market overall, always pay attention to how we close because how we open doesn’t count for squat. Wednesday was a nice close and even with the wind at their backs Wednesday morning, bears couldn’t extend the selloff. It definitely feels like we are running out of sellers at these levels and that is a recipe for a near-term bounce.

Latest comments

Your analysis doesn't make sense. Without the futures market, the cash market would have lower lows.
Today's speculators and cave dwellers have pushed the index 20 points above yesterday's high. Are they wrong again, or it depends?
From Tuesday's highs some contraction may have been expected. I still got it wrong when I got ripped out on my 'Stop losses'. Today is heading for a gap-opening. I hate running after a gap. Particularly when I already sold cheap. So it depends how the gap behaves. If the gap is closed and the market stays within yesterdays range, then the market opened too high. If the market opts higher, then the gap offers resistance.
There was really a lot of 'noise' on the way up yesterday, so it's really hard to imagine how the short term trader would 'bear' sit it out.
If trading certificates at an x20 sensitivity, a 2% market downswing may cut values by 40-50%. If the market closes at the low, then the market must travel 80-100% to bring you to the top again. However, if you are fortunate and hit the intraday low and the market rebounds with 2%, there is a 80-100% gain, rather than 40-50. So the intraday dips or extremes within the market fluctuations are most valuable if one can stick with these.
Get some IQ
Exactly... My comments were deleted, since he didn't like them. What a B S article
Agreed, naive and stupid
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