Take a look at this pre-market chart of Nasdaq futures:

NQ (Nasdaq futures) are gapping (A gap is where we open completely outside the range of the prior session) into what we call an “extreme posture” in this chart.

Nothing says short here yet, but this configuration does tell us it is getting late for longs in the day time frame and we should be careful about buying this gap higher.

To buy here would be like going into a neighborhood and asking what the median house price is and being willing to immediately pay above value: 

• Could prices go higher?  Sure.
• Are the odds in favor of this? Not really.
• Are there better prices to buy?  Absolutely!

The auction is running out of inventory at price (note the diminishing histogram on the right) and we are now trading above both near and mid-term value.

We call this an “extreme” posture and it always has us looking to take short positions (or wait to buy until we see the auction come back and hold a prior inventory area).

If we do establish a short (if we see the gap close, or we see strong sellers enter the auction after the open), it will be an intraday swing trade with a target back to the near term value reference of 7648, which is a better location to look for buys (to hold for any length of time) in the current context of this market.

Now, see how the day progressed:

A few buyers stepped in immediately after the open and then found themselves underwater the rest of the day.  Sellers stepped in shortly after the open and closed the gap, returning to a prior level of inventory (the first larger peak in the histogram on the right).

This volume profile showed us early that buyers needed to be more patient as sellers could take advantage of targeting back to prior inventory levels, which were better prices to buy.

The maximum place for pain in this example is if you bought the open. The maximum place for pain would be if you sold at the prior inventory levels.

By using the profile, we were able to see what others could not and take advantage, avoiding the pain of the wrong activity at the wrong levels.

The takeaway? Consider keeping multi-session volume profile data available to see when inventory is getting light at higher or lower prices. This is often a clue that we are in for a momentary pullback.