Tuesday, February 10, 2009

Understanding the Stock Market's Overnight Range

The previous post took a look at characteristics of non-trending, range days in the market; prior posts have examined uptrend days and downtrend days. Once you have an idea of the structure of a market day, you can plot a strategy for trading that day's market. That is essential for daytraders, but also aids longer time frame traders and portfolio managers in the execution of their ideas.

The overnight S&P emini market (ES futures) represents how value in the U.S. stock market is impacted by evening news events, overseas markets and news, and early morning economic reports. Is the overnight market trading within yesterday's value area (i.e., near yesterday's pivot price)? That suggests that events have not materially moved investors; often this leads to a quiet market open.

As a rule, the first price levels we'll test off the market's opening range will be the edges of the overnight range. A market that opens near the middle of its overnight range, moves lower, but cannot sustain a move below the lows of the overnight range is setting up a trade back into that range. In other words, we treat the overnight session as if it were a separate trading day unto itself. If the overnight market is trading within yesterday's regular session range, we look for a break above or below the overnight range to target a move to the prior session's highs or lows. Historically, 85% of all markets will *not* be an inside day; i.e., will pierce either their prior day's high or low.

Many worthwhile ideas about the day's structure can be derived from understanding the relationships among yesterday's range, the current day's overnight range, and the current day's opening price range--particularly when we place these in the context of volume, which represents the participation of large trading institutions. This will be the topic of upcoming posts.


Get In Get Out said...

Basically all this mumbo jumbo is written in technical terms & states that there is a 50-50 probability chance of one or the other happening. I cant stand how people who have "DR" degrees always makes things sound sooooo much more technical and difficult than it really is. Did you ever hear of the term keep things simple stupid.... I am not trying to sound obtuse or absent minded but in college every time I had a professor that had a "dr" surname I had such a hard time understanding the course vs. a general regular college professor. I guess we all either have a linear or radial way of thinking. If one does not know where the market is heading, keep things simple stupid by going in with 1 lot to test the market with a 3 point stop untill one has a better feel. Keeping things simple also is being observant by looking at head & shoulders where there were 2 on the opening of geithners speech, and we had a few double top and bottom W's and M's Shapes. Keepin Things Simple Stupid...

Mike said...

Actually I found Brett's post interesting and useful food for thought. Basically the overnight range provides some insight into at least the earlier part of the day.

Although the US markets influence Europe and Asia more than the other way round there is no doubt that strong directional markets an Europe and Asia affect overnight ES that in turn has an impact on the US market.

Brett Steenbarger, Ph.D. said...

Hi Get In Get Out,

I agree with the value of simplicity, as long as the analysis is not simplistic. One correction: the Dr. is not a surname. Dr. goes before the name. The Ph.D. designation goes after the name.


Brett Steenbarger, Ph.D. said...
This comment has been removed by the author.
Juan from San Juan said...

Mr Steenbarger
I thank you for your blog about after market volumes.
Any little insight about how the markets work is always of great help for us investing apprentices