Models and Alien Units can, as an action during their Activation, go into Overwatch mode. This sets the Model/Unit up for performing a Shoot Attack on any target that moves into a Square that the Overwatching Model/Unit's Shoot attack can reach. Note: it only triggers when a Model/Unit moves; if a potential target Model/Unit was already in range when the Overwatching Model/Unit went into Overwatch mode, it can't attack that potential target unless it actually moves.
A Model or Alien Unit can use either both of its actions to go into a full-powered Overwatch mode, or can use only its second action to go into a weaker Overwatch mode. In either case, an Overwatch token (with the image of a target reticle) is placed next to the Model/Unit in Overwatch mode; use the red side with a plus in the centre for the full-powered Overwatch, and the blue side without ap lus for the weaker Overwatch.
An Overwatch Shoot attack is triggered immediately when the moving Model/Unit steps into a Square that is within attack range; the ongoing movement is suspended, and the Shoot attack is performed, and the attacker is no longer in Overwatch mode; remove the Overwatch token. If the target survived the attack, it may resume its movement action if its had not moved its maximum movement range.
The procedure for making an Overwatch attacks is the same as for a regular Shoot attacks, except that the weaker Overwatch mode uses one less Combat die than the normal Shoot attack.
Footnote: by just reading the game's rulebook, the exact timing for how the Overwatch attack was triggered was unclear, but Archon Studio have clarified that the Overwatch happens immediately, not at the end of the movement of the moving Model/Unit.
It was also not clear if Overwatch was only available for Heroes, or if Alien Units could also use it, but this was also clarified by Archon Studio: Alien Units can also use Overwatch.
Combat
See Attack.