23 May

The Power Of Overnight Resistance

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Have you ever found yourself wondering what to do after you enter a trade?

Or have you ever found yourself nervous about exiting a position after you bought a bunch of stock?

It’s ok if you said yes…

It’s actually common…

In fact, I think the medical term for it is called exitaphobia, or…

The fear of exiting a trade due to error.

And it really puts traders in a bad spot.

Without knowing when to exit a trade you can be left second guessing yourself, relying on hope not strategy…

…or even worse, holding onto a trade that goes against you—leaving you just paralyzed while your losses pile up.

But luckily this is a problem that can be easily avoided by simply following these two simple exit rules

I’m talking about how to use the overnight price action to tell you when you should take profits (or losses) on your trades.

And by doing so you won’t be left staring at a trade you don’t know what to do with!


Overnight Market Hours


If you are new to trading, chances are you know that the markets are open to trade from 9:30am to 4:00pm every day.

But did you know that the markets are actually open to traders for far longer than that?

It’s true – the markets are actually open in the “pre market” and “post market”.  

The “pre market”  trading session between 4am and 930 am and the “post market” trading session is between 4pm and 8pm.

But it actually doesn’t stop there either, there are contracts that trade around the clock called Futures that actually tell you what the markets are thinking in the hours that they are closed.

The overnight futures markets cover the US Equity markets from 8pm to 4 am every business day.  And for the weekend, the markets close at 4:15pm on Friday, and resumes Sunday at 5pm

Now that you know there are these “hidden” market hours, let’s talk about how to use them to your advantage and predict what the markets are going to do during the real trading day.


Pre/Post Market Highs and Lows


One way that I like to trade is by scanning the pre market trading session using my proprietary strategy for pre market momentum alerts to get me into the SPY to ride the overnight trading momentum caused by the global markets.

If you’re just starting to look at the pre market trading session for the first time, you should go back and take a look at how the prices bounce off the pre market highs and lows.  

For 9 out 10 of the sessions leading up to today’s trading, the premarket high or low has been touched.  

And almost always do you see the overnight highs and lows touched at some point in the trading day when the market opens.

This means not only can we use the pre market highs and lows as levels of support and resistance to trade off, but also as price targets if currently in a trade.


The SPY Trade


Let’s start with a 30 minute SPY chart to get a “bigger picture” of what’s going on prior to placing the Trade of the Day.


Source: Thinkorswim


As you can quickly see, the markets had a very well-defined range they are in throughout the entire post and pre market trading session.

From what we can see in the image above, the markets are opening a bit of a neutral position in the middle of the overnight range.

But based on the overnight momentum indicators we actually have a slight edge by trading the markets long.

Now let’s drop down to the 1 minute timeframe and see what is going on at the open.


Source: Thinkorswim


From here you can see that the markets are looking to trade higher right from the beginning of the morning.

The 5 minute range breakout was showing that the momentum was in fact toward the upside, which was supported by the premarket momentum.

As the stocks look to trade to the upside, we would target pre market highs as a place to exit the trade for profits and monitor the position to see if we could break above it and continue higher.


What Actually Happened


Before you ever enter the trade, you should always have your target and stop prices well-defined in advance.  

This way you know exactly what to do in case things go bad, and also if things go your way.

You should always have some sense of WHERE the market is going!

As expected, the market rallied right from the break of the 5 minute rage and went directly to the overnight high price.  

That’s where I excited my Trade of the Day for a 10% winning trade!


Source: Thinkorswim


And that’s where we took our exit in the trading room.

But here’s what you also could have done with these price levels.


The Alternative Trade


For the advanced traders out there, maybe you saw an edge and wanted to trade the stock market in the opposite direction.

And you could have!  

There were plenty of clues that led to the next trend after the long position was closed out.

Let’s take a look at how the markets handled price action at the top of the pre market highs.


Source: Thinkorswim


As expected, the markets struggled to break above the pre market highs.

And for about 5 minutes the markets continued to attempt to break above the resistance level but continued to fail to do so.

This signaled to me the markets were heading lower.

If you were wanting to go short the SPY this would be the breakdown you would want to go short at and place your hard stop slightly above the pre market highs.

And from earlier, you want to know where your targets would be to exit in advance…. So you would want to use the pre market lows for this price level.  

You can see that right from the where the markets broke down from the highs, they were drawn to the pre market lows like a magnet.


Wrapping Up


As a day trade it’s always important that you go into each trade knowing 3 things… your entry price, your hardstop price, and finally your targets.

Then once you have those prices identified in advance, you will never find yourself getting into a trade and failing to exit your trade due to exitaphobia, or the fear of exiting a trade due to error. 

If you’re ready to take the next step with your trading and learn a system that I trade actively each day, just sign up for Daily Deposits here



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