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Why Overnight Market Moves Are So Misleading

By Jani ZiedinsStock MarketsOct 07, 2021 12:40AM ET
www.investing.com/analysis/why-overnight-market-moves-are-so-misleading-200604256
Why Overnight Market Moves Are So Misleading
By Jani Ziedins   |  Oct 07, 2021 12:40AM ET
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S&P 500 Index Daily Chart
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.

Why Overnight Market Moves Are So Misleading
 

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Why Overnight Market Moves Are So Misleading

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Comments (6)
Juniper Ls
Juniper Ls Oct 09, 2021 3:29PM ET
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Your analysis doesn't make sense. Without the futures market, the cash market would have lower lows.
George Pichurov
George Pichurov Oct 07, 2021 4:23AM ET
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Today's speculators and cave dwellers have pushed the index 20 points above yesterday's high. Are they wrong again, or it depends?
Andrew Bevan
Andrew Bevan Oct 07, 2021 4:23AM ET
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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.
Andrew Bevan
Andrew Bevan Oct 07, 2021 4:23AM ET
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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.
Andrew Bevan
Andrew Bevan Oct 07, 2021 4:23AM ET
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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.
Wilks Campbell
Wilks Campbell Oct 07, 2021 3:42AM ET
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Another example : if logistic disruption is so serious, then economic activity level would be lower, the chance of higher demand for oil or gasoline should be low. Some people with peanut brain said it is the NE pipeline problem. Come on, give me a break. You should ask who benefit if a panic purchase is created ? Wake up and see and learn how Wall Street gang work !
Wilks Campbell
Wilks Campbell Oct 07, 2021 3:28AM ET
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I am sure the Wall Street gang has many more od these type of dark manipulation pieces kept at their drawers to pull out to keep the market going up and flip flop for their gain until it cannot work anymore. The bad news is they seldom running out of those whip off tools !
Wilks Campbell
Wilks Campbell Oct 07, 2021 3:20AM ET
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the early pessimistic and caution is highly justified. The reverse or volatility is cunningly made by the sudden oil reserve from the air and the republican sudden cooperations for short term extension of the debt ceiling. We all became the lunch of the Wall street crocodiles !
Serg NewJersey
Serg NewJersey Oct 07, 2021 1:01AM ET
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Get some IQ
Chris Johnson
Chris Johnson Oct 07, 2021 1:01AM ET
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Exactly... My comments were deleted, since he didn't like them. What a B S article
Peter Kambolin
Peter Kambolin Oct 07, 2021 1:01AM ET
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Agreed, naive and stupid
 
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