How Overnight Action Can Gauge Market Sentiment

The overnight action is truly important in the financial market. This happens mostly because companies tend to report major news after the market closes.

Further, since the financial market is global in nature, there are many events that happen in Asia and European markets that can have an overnight impact on stocks.

What is the extended session?

The regular session in the United States is usually a bit short. It starts at about 9 am and closes by 4 pm. Therefore, most people don’t usually have an access to the market since they are at work (if they trade part-time). While the regular session ends at 4 pm, stocks continue trading in the extended period.

There are differences between the regular session and the extended session. For one, in the regular session, markets are usually routed through a market maker like Citadel and Virtu Finance. A market maker will typically receive these orders and execute them on behalf of the broker.

In the extended session, trades are routed through an electronic system that matches buyers and sellers. At the same time, only pending orders can be executed in this period. Further, some financial assets are not offered during this period.

Related » All the Trading Orders You Need to Rule the Markets!

Top overnight market events

There are several types of events that are common in the overnight session. Some of the most common ones are:

  • Earnings - In most cases, companies usually publish their reports before, during, and after the market closes. Well-known companies like Apple, Microsoft, and Google usually publish their results after the market closes.
  • Speeches - At times, speeches have an important role in the market. For example, speeches by people like the Fed Chair and the US president could have an important implication.
  • Geopolitics - At times, some geopolitical events can have implications in the financial market. For example, the Russian invasion of Ukraine happened during the overnight session.
  • Economic data - There are several key economic data that happen during the overnight session. These numbers are from both the European and Chinese markets.

Asian and American stocks correlation

One way in which the overnight session impacts the American financial market is the correlation between the Asian and American stocks. In most cases, if American indices like the Nasdaq 100 and S&P 500 rises, the same trend usually happens in the Asian and European market sessions.

market hours intersections

This is mostly because American investors are also usually popular participants in Asia and Europe as well. For example, on the day of writing this article (end of April 2022), American stocks declined sharply after the Federal Reserve chair hinted that the Fed would be more aggressive.

» Related: Trading under the FED decisions

The Dow Jones declined by more than 1,000 points. And in the following day, the Nikkei 225 and Hang Seng indices also fell by over 1%. Therefore, a trader can use the market action in the United States to trade the Asian session.

American Depository Receipts (ADR)

Another way to use the overnight session is to focus on the so-called American Depository Receipts. These are certificates issued by a US bank that represents a foreign company. These ADRs help people in the US to trade international stocks.

Therefore, if you see the stock of an Asian company like Alibaba or JD.com drop in the Hong Kong market, you can be sure that their ADRs will decline as well since these stocks are moved by the same factors.

Asian stocks with American impacts

Another factor is that many foreign companies have an impact on American stocks. Therefore, their price action will often have an impact in American shares. For example, Apple suppliers like Taiwan Semiconductor, Foxconn, and Hon Hai Precision.

When these stocks drop, there is a high likelihood that Apple shares will likely drop.

Similarly, when Japanese automakers drop, there is a possibility that automakers like General Motors and Ford will drop as well.

The role of a watchlist

In a previous post, we wrote about the role of a watchlist in the financial market. A watchlist is a tool that summarizes the happenings in the market.

You can create a watchlist or use one that has been created already. At DTTW, our team of experts regularly send a watchlist of the top movers in premarket trading. This list can help you make better decisions.

Summary

In this article, we have explained what the overnight session is and how it affects the American and Canadian markets. This effect can go either from the Asian (or European) session to the U.S. session or vice versa, with data released from the U.S. and Canadian markets spilling over into the Asian markets.

We have also noted the importance of having a watchlist (or other similar tools) and how to use it in trading.

External useful resources

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