David Capablanca tries to profit from the falling price of a stock by short selling. He looks for gaps between price and VWAP, volatility halts, and second breakouts. He also reviews stocks’ historical charts to determine where their resistance lines could be. When a trader looks at a chart, they see the same candles, lines, and bars that every other trader sees. These signals are data points that indicate things like share price and trading volume, to name a few.
But it would be a mistake to assume that everyone who looks at charts interprets the data similarly.
Long-position traders attempt to read signals that could help them profit from the rising price of a stock or limit their losses. On the other end, David Capablanca tries to profit from the falling price of a stock by short selling, borrowing a stock and selling it with the intent of repurchasing it later at a lower price and pocketing the difference.
While he uses many of the same indicators as long-position traders, he’s looking for signals that could indicate a reversal to the downside. However, the chart isn’t his only point of reference. He has a checklist of variables that he looks for before deciding to short a stock. His list includes sudden price increases above 40%, positive news catalysts, stocks with small market caps and floats, low borrow fees, low institutional ownership, and near-term dilution. If most of these variables converge, he uses the indicators on a chart to help determine whether his thesis is playing out.
Insider viewed monthly brokerage statements of Capablanca’s trades between February 2021 and April 2023. According to TraderSync, an online trading journal that tracks performance, his current win ratio is 94.91%. David Olivares, the chief technology officer at TraderSync, examined the statistics against Capablanca’s Interactive Broker statements and raw trades obtained through the Interactive Broker API, and cross-checked some transactions from his Cobra account. Olivares noted a potential margin of error of 2%, bringing TraderSync’s 91.57% win ratio for Interactive Brokers to 90%.
Overall, Capablanca uses up to six trading accounts; Interactive Brokers and Cobra make up most of his gains. Six of his accounts had win ratios between 92% and 97.66%. He trades one stock at a time in each account to limit his risk exposure. He’s also able to shop around for the best locate fee, or a flat per-share fee to borrow shares to short sell.
4 chart indicators The volume-weighted average price (VWAP) is central to his trading strategy. The indicator measures the average price traders paid for a stock. Simply put, it’s the number of shares purchased (volume) multiplied by the share price and then divided by the number of shares purchased.
This is indicated by a gap on the chart between the VWAP and price. The image below demonstrates what Capablanca would consider a notable gap between the two points.
Gap between price and VWAP David Capablanca, Thinkorswim platform If a stock’s price is overextended above the VWAP, a long trader may avoid taking a position because the stock could be seen as overpriced or overbought in the short term. This causes the upward rally to run out of steam and signals a potential reversal in price to the downside. For Capablanca, this presents an opportunity to take a short position.
He doesn’t use guidelines such as a percentage difference to determine if the gap is big enough. Instead, he eyeballs the chart. The gap between price and the VWAP is more persuasive when the stock is rallying without any underlying catalyst such as positive news, he noted.
The indicator is less useful to Capablanca if a small-cap stock has high institutional ownership because its price will likely be less volatile and not stray far enough from the VWAP, he said. In a previous interview with Insider, Capablanca said he avoids small cap stocks that have institutional ownership above 40% because it’s less likely their prices will break down.
He also uses VWAP to determine where he should cover his positions. As the stock’s price nears the VWAP or dips slightly below it, he begins to buy shares to cover the trade because he anticipates a bounce back near that line.
He reviews a stock’s historical chart for the last price peak with volume. This indicates the price point where many traders purchased shares before the price plunged, leaving them stuck holding the shares. He refers to them as “bag holders” who will likely dump their shares when the price retraces near that high. This price point could indicate a resistance line and a possible area to short the stock, he said.
He reviews a stock’s one-year historical chart for these high volume price peaks. Those within the last three to six months are the sweet spots because traders are likely still holding their shares. Beyond that point, they may have sold off or even forgotten about the shares.
Another indicator he looks for is a second intraday breakout to the upside. This can occur shortly after the first price peak of the day or up to a few hours after. Capablanca believes a second rally happens when too many short sellers begin to purchase shares to cover their positions. This drives the price back up. In turn, it attracts long-position traders who carry the price up further.
And finally, he looks for stock-trading halts that can happen for a variety of reasons. The specific one Capablanca looks for is a mid-day volatility halt or a circuit breaker that stops trading on a stock for about five minutes due to extreme price swings. On a chart, this looks like a space between two candles.
The image below demonstrates what a volatility halt looks like. It will be accompanied by high volume.
Volatility halt David Capablanca, Thinkorswim “When it opens up, it shoots higher. It’s like a springboard. And then they come crashing back down because it wasn’t justified,” Capablanca said.
He places an order during the halt and then scales in with a larger position after trading reopens if the stock confirms his thesis and begins to drop in price.
For example, on July 11, he shortened Flora Growth Corp (FLGC) after he received an alert on it because it halted. The stock had opened at $2.70 and then halted at 1:35 p.m. after a sudden spike in price that sent it to $3.16. It also had a gap between its share price and the VWAP. He began to put orders in, scaling into a short position at share prices between $3.68 to $3.80. He used the entry of the halt as an exit point and began to cover his positions at share prices between $3.30 to $3.19, according to his brokerage records viewed by Insider.
The trade yielded realized gains of $3,551, according to his Thinkorswim account viewed by Insider. Capablanca emphasized that he didn’t short the stock solely based on the halt. While trading was paused, he did his due diligence by running down his checklist to be sure the stock met additional requirements that include float size, share price, and historical behavior.
“The halt plays are great because I get to come up with a game plan,” Capablanca said. “It gives me five to 10 minutes. It’s like a timeout in sports. So it gives me time to get a game plan together. I put orders in while the sock is halted so when it turns on, if it hits those orders, it’s great. And I’m also manually hitting the orders too.”