Since during regular hours trading, price action is based and buffered by the underlying S&P 500 index and the news of the day, what drives price action during the overnight hours, excluding major overnight news?
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This article from Tom Busby (futures magazines) is rich of precious informations:
The key to understanding the night market is knowing who is controlling it.
The first major market to open following the close of the U.S. day session is the Nikkei stock index in Japan, followed by the Hang Seng stock index in Hong Kong. These are the two primary Asian markets. When they have the floor, they not only set the tone for the next day's trading in U.S. stocks, but they push and pull the overnight E-mini market as well.
Asia has its own economy and its own news, and how and when that news filters in affects where the market goes. The E-mini S&P 500 futures will follow these trends while Asia is open.
One word of caution, the Globex market (the night market) moves slowly. Unlike the day market in the E-mini S&P, which has an average range of about 25 points, the night market will move only about seven points, on average, in a 16-hour period. Compared to the day market, which is open only six hours, 45 minutes, patience is a necessary quality for traders participating in the overnight Globex market.
The first lesson most new night traders have to learn in this environment is, don't be eager to get paid quickly. Though the night market can move like the day market during big news, you'll generally feel like you're watching paint dry if you try to follow it tick by tick. The best strategy is to wait for the right setup, get in the market, place a protective stop and go find something else to do, only checking in on your trade every now and then.
WHEN EUROPE WAKES
As the European markets begin to open at 1 a.m. CDT, more evidence of market direction can be seen. Germany has the largest economy in Europe and its DAX futures is a solid market to follow. Because of this transition, the E-mini S&P futures begin to follow the lead of the DAX futures during this time.
As with U.S. markets, it is best to give the DAX the first hour and a half after its open to allow it to find a direction. During this adjustment period for the DAX, the overnight Emini S&P market also needs time to readjust from the waning influence of the Asian markets to that of Europe.
ON THE OPEN
One of the best trades in the DAX futures markets is made after the first 30 minutes of the German cash market. The DAX futures begin trading at 1 a.m. CDT, but the cash market does not open until 2 a.m. Though we must look at the global markets for confirmation, trading off the cash market's opening range will normally pay a minimum of five DAX points.
Most European news is announced between 3 a.m. and 4 a.m. CDT. Waking up at 2 a.m. every day can get tiring, but 4 a.m. may be a little more amiable to normal sleeping habits. Because economic news is almost always a market-moving event, it often pays well to get up and see if the markets are moving off European news (one reliable site for global overnight news is www.fotexfactory.com). Borrowing the same technique used after the DAX cash market opens, the previous 30-minute bar prior to news hitting the market can be used for an entry trigger.
That introduces another concept that is important to consider for night markets. While most traders use oneor five-minute bars to trade shortterm swings, consider a 30-minute bar to take the hash marks out of the market. Remember that the Globex market moves slowly during these periods and may have only a 0.50-point range during a 30-minute period. Individual one- or five-minute bars may show little movement during these periods, appearing as hash marks on the screen and obfuscating your analysis. A larger 30-minute bar will show a larger range and take the noise out of the market.
Trading at night can try your patience if you are not used to watching a slow market. However, as the sun moves around the world, more volume and volatility pour into the market, making it easier to get in and get out with a profit, but you have to know where to look and when to look there. It's not easy, but the work will be worth it for those nights when the world's markets agree, the odds of a good trade reach a critical mass as the DAX futures open, your domestic competitors are fast asleep and you're poised at the Globex screen ready to pounce.
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Actually, the best startegy may be to initiate your trade at the close of the day, and cover your trade at the opening the next day.
SPY is up 194% since it began trading. As shown below, the compounded return of buying at the close and selling at the open has done much better than that at +378% over the same time period. On the other hand, if you bought at the open and sold at the close every day since SPY started trading, you would be down 38.6%!
Charts courtesy of Bespoke Investment Group
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