The U.S. markets are now just one spoke in a 24-hour global cycle that is in constant motion. Increasingly, Wall Street is sharing its traditional dominance with financial centers like Shanghai, Hong Kong, Sydney, Dubai, Frankfurt, London, and Sao Paulo. As the sun rises and sets, these markets engage in a continuous process of price discovery for equities, debt, commodities, and currencies. Lightning-fast algorithmic trading has intensified this process, allowing risk in one set of exchanges to be hedged in another set.
Studies have shown that most humans need seven to eight hours of sleep a day. Perhaps traders can get by on less, but no one can regularly stay up for 24 hours. How then can traders keep up with what has become a 24-hour cycle? Smart equity and futures traders have come to depend on 24-hour S&P 500 and NASDAQ 100 index futures charts that show the overnight action.
U.S. index futures generally move in lockstep with the global network of markets, reacting to local and macro issues while American traders are catching up on their sleep (for more see The Basics Of Trading S&P 500 Price Progression). The contracts' surveillance elicits more price disruptions at the U.S. opening bell for two reasons: (1) Funds can now react to changes in market conditions instantly, rather than waiting for the sun to rise in New York City and (2) funds can initiate anticipatory buy or sell programs to capitalize on price shocks during U.S. hours.
Reading Overnight Action
Follow these steps to read overnight action with a 24-hour S&P 500 and NASDAQ 100 index futures charts:
- Set the time scale on your charting program to 60 minutes. Keep these handy graphics available during the U.S. market day.
- Place 5,3,3 stochastics below price bars to identify buy or sell cycles that are likely to impact local markets (to read more see Pick The Right Settings On Your Stochastic Oscillator).
- Place 50- and 200-bar exponential moving averages (EMAs) across price bars to identify whether bulls or bears have taken control of short-term price action (read more in Strategies & Applications Behind The 50-Day EMA and Learn How Trade Management Works With 200-Day EMA).
Highs and lows posted in overseas action become key inflection points during the U.S. session. Look for breakouts, breakdowns, and reversals at these price levels to impact trade flow. Trend-following strategies are more likely to work when European and Asian levels are exceeded in either direction. Meanwhile, expect compressed price action that favors swing trading strategies when reversals keep U.S. prices within overnight boundaries.
Divergences with U.S.-Only Indicators
By comparing a 24-hour index futures chart with a U.S.-hours only chart, you can to identify divergences to generate profitable intraday opportunities. Stochastics cycles will often conflict, predicting local strength despite an overnight sell cycle, or vice versa. Rather than confuse, these conflicts work well when looking for long entry in buy-the-dip strategies or short entry during bounces. They also allow profitable exits when the 24-hour cycle favors a reversal by the end of the U.S. trading day.
Comparing relationships between moving averages on both sets of charts adds another layer of actionable data. U.S. markets are likely to find support or resistance when overnight levels get hit. These hidden points assist short-term strategies when identical averages show broad variations, which only happens in volatile environments when index futures shift many points from the prior U.S. close.
S&P 500 index futures show markedly different patterns after a volatile night in Asia and Europe. The contract gaps down to 2100 overnight and sells off to 2093 ahead of the U.S. session. A stochastics buy cycle kicks into gear after the open on the 24-hour chart, but the U.S. session indicator doesn’t print a buy signal until 2 hours later, right after the lunch hour. This predicts that local sellers will have a hard time dragging the broad market lower in a downside trend day.
The Bottom Line
After the U.S. closing bell, the market clock shifts east to Asia and Australia. After the Hong Kong, Shanghai, and Sydney exchanges close, the European markets are next, coming online about six hours later. Frankfurt and London hit their first peak and then share space with U.S. markets in the second half of their day. The New York and Chicago afternoon sessions signal the only time that American traders carry the ball by themselves, as the market clock completes one 24-hour cycle and sets up for a new one. Overnight action in index futures sets the tone for the U.S. market day. Smart equity and futures traders review this price action as soon as they start the new day, highlighting key levels that could come into play during local market hours.