He looks for gaps between price and VWAP, volatility halts, and second breakouts.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.
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 athat 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.
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.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.
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. . 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.
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.