While big money often can’t dump or add their size during illiquid hours, that doesn’t mean they don’t do anything during pre-market (PM) and after-hours (AH) trading. They know the prices they want and are happy to provide liquidity and probe the market at those levels. Understanding where the stock found support (or met resistance) during these illiquid hours provides cues about where big players are willing to buy or sell. Often, these support and resistance areas coincide with those on longer time frames. This also shows how much impact a particular breaking news event has.

For example, let’s say a company reports bad guidance after the close, and the stock slips, violating a longer-term trendline. During after-hours trading, the stock will develop levels, the most important of which are the first resistance and the lowest support. Now, let’s say the next day, before regular trading hours, the stock is trading even lower than the AH support (which, as you already know, may become resistance). This indicates that supply is greater than what buyers anticipated the previous day, and the stock develops a new important support level in the pre-market session.

Thinking in terms of supply and demand, if there is no long-term support ahead, the best area to establish a short position is below the lowest pre-market (PM) support, as all buyers are out of the money. You also want to consider being short if the stock is below the lowest after-hours (AH) support, which has turned into resistance, as shown in the example above. However, all things being equal, you probably don’t want to be as aggressive with your short below the lowest AH support as you would be below the lowest PM support.

You should remain bearish until the first resistance is breached. As you may already understand, if the first resistance is broken, it means all short sellers are out of the money and becoming nervous. Additionally, people who sold their positions may start to regret their sales and could chase the price higher. At this point, it makes sense to adopt a bullish stance.

Now, let’s say all things remain the same, but the first resistance coincides with a significant support area on a longer-term time frame.

That makes a short against that area much more promising compared to the first example—trapped buyers would increase the supply, as support turns into potential resistance.

However, in the examples above, you don’t know how emotionally invested longer-term traders are, because the longer-term market structure does not provide any specific numbers in those examples. Take a look at the longer-term market structure below and consider where investors would be more willing to sell after a gap down on breaking news.

In the first example above, investors who bought at $30 are more than 30% in the money, whereas in the second example, they are less than 4% in the money. Of course, all things being equal, gapping down on bad news will provoke more selling pressure in the first case because longer-term traders will want to lock in their profits, at least partially. Additionally, in the first example, the stock opens at around $43, giving us $3 to the first significant potential support. In the second example, the stock opens at approximately $31.30, leaving only 30 cents to work with.

Now, let’s review another example where a stock was in a longer-term downtrend, and then

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