CNBC Pro Talks: Frank Cappelleri on charting stocks for success 7/26/24

0:01This is CNBC Pro Talks, where we go one on one on one with Wall Street's top investors,. smartest traders and rising stars. We find out what makes them tick, what makes them money windows. And how you can follow in their footsteps. Welcome back to another edition of CNBC Pro Talks, the flagship interview series for CNBC Pro. I'm Dominic Chu. This month's guest is Frank Capillary, the founder and president of Cap Thesis. He's also a CNBC contributor. And if you're a subscriber of CNBC Pro, you've likely seen Frank's insights. He breaks down what investments from small cap names to tech titans to cryptocurrencies may be poised for a breakout, according to the charts.

0:46Frank's got over 25 years of experience on Wall Street from working as an equity sales trader all the way up to a technical analyst. And we are lucky to have him here with us today to hear how his expertise helps him make investing decisions on behalf of his clients. Now, let's start with some of the background information because we want to kind of get to know you a little bit, Frank. I mentioned you have a quarter century of experience. Can you tell us about just what led you to the technical analysis side of the business that you provide for your clients at Cap Thesis and how it kind of evolved your views on those particular fronts?

1:23Well, Dom, first of all, thank you very much for having me. Big fan of your work as well. So it's a pleasure to be here. And so 25 years sounds like a long time. And so I got my start in 1997. So you may not believe it, but back then, the Internet was not on everyone's desktop. And so I did not know what technical analysis was, but I had the chance to interview for a position in the technical analysis group at Smith Barney at the time. And so I didn't know a lot, but I knew what I didn't know was I didn't understand what the market was all about. So I was excited to get started, and little did I know I was working with two technical analysis pioneers at that time, Alan Shaw and Luis Yamada.

2:02So that was an interesting time, of course, because it was the early stages still of the technology boom into bust. And so if you think about that time, it was all about day traders, people quitting their jobs, wanting to trade stocks, and it seemed very easy. So the type of a person that you probably would not assume was going to latch on to a trend like that were people that were in their 50s and 60s. But that was the group, and they'd been there for a long time. One of the things that really stood out for me during that time frame was that we ran an allocation model, so basically looking at different industry groups just week over week and deciding which ones for the model would buy.

2:41Week after week, you'll notice that the relative strength line of all the technology Internet groups were ticking higher, so that just meant we'd stick with this trend. And so really for the most part, we were able to ride that trend until it changed, And that changed, of course, in March 2020. So I went from being in that group when understanding that being overbought was the best thing possible in a market like that to then moving over to Instanet, which is the trading arm of Nomura. And from there, I went from sitting in the cyber research department, nice and quiet, to being in the middle of a trading desk as internet stocks started to roll over.

3:23and I quickly learned that being overbought is not good in all trading environments. So from that point, I spent a number of years as a sales trader, but the bottom line is for the first six years of my career, I saw two completely different markets, and it made me realize, too, number one, that technical analysis really appealed to me and made me understand what the market was like, and also that there's so many tools within the technical analysis arena that you can't use all of them at the same time across all markets, because as we know, it's completely different from what we saw in 2022 to what we see now in 2024.

4:00And I keep that very much in the front of my mind when looking at charts every day. So Frank, this is interesting. I'd like to kind of maybe delve into that point a little bit more, because you mentioned the tools and everything else that kind of you use to color your decisions and kind of lead you down certain and Paz, what exactly would you say are those things, those tools, those concepts about your strategy at Capthesis that sets you apart from some of your competitors on Wall Street? Well, there are many smart, very successful technical analysts out there. Many of us use similar tools, but we use them differently.

4:37There's always the people ask the question, is technical analysis more of a science or an art? It's both. because I can look at an indicator and use it a different way than someone else does. But if I were to say if there's one specific tool that I use the most, it's simply looking at classical chart patterns. And that's very helpful in a market like this because looking at the S &P 500, for instance, right now it's been an uptrend, but it's been a series of breakouts to get us there. That doesn't always happen. So if we look at it right now and it seems easy, that did not occur at all. 2022. We had some very sharp bear market rallies, but they were so sharp that we didn't get a sense of any patterns being shaped.

5:20And so a lot of times you hear about volatility being high, but the VIX itself doesn't really measure volatility on the upside, meaning that it responds, the VIX will really rally the volatility index when the market goes down. But when you have big, strong daily 1 % gains or more, that doesn't really get reflected. So one of the things I really rely on is just tracking the number of, say, 1 % moves on a day-to-day, month-to-basis. And because you have a low frequency of them, that helps those breakouts work. When you have an overwhelming amount, it just means you're in a very treacherous trading market and probably shouldn't be looking for bullish patterns to form, or if they do, be a little hesitant trusting them just because of the type of trading environment that we're in.

6:08well it's interesting as well because many of those types of measures the kind of data that you're looking at is the same data that everybody looks at i mean the charts say the charts the price action is the price action the the number of puts and calls open interest on certain futures contracts all of those things are the same pieces of data so it's the interpretation that matters And to your point, that's how you try to differentiate. Could you also take us through what exactly you look at to differentiate between what is so-called signal and what is so-called noise in some of those charts and in some of that price action?

6:53Because oftentimes, traders, investors, pro subscribers can look at all of this data, look at all the charts and have a hard time trying to figure out what exactly is a call to action or a catalyst as opposed to something you should just maybe put in the back of your mind or even ignore? That's a great question. I'll give you one specific example. So there's a popular technical indicator called the MACD indicator. And so a lot of times when the market gets very extended and then tends to roll over a little bit, that will give us a sell signal. It's basically just two moving averages for the most part.

7:29And when they start to roll over and the faster one rolls over and the slower one, that's a sell signal. And so those worked extremely well in 2022. Four straight times, it really nailed the top, and you get 10%, 20 % moves to the downside. So since that point, it hasn't, though. I've looked at this a lot, and there's been, I believe, 12 MACD sell signals. Only two of them have worked so far from the end of 2022 until now. It just tells us by not paying attention to anything else, if that is the case, you know we're in a strong market. because those, I would say, to me, I look at those as warning signs first.

8:11They become a signal, I think, when you see a downside reaction, and when that tends to happen over and over again, that's when we should really be paying attention. And a lot of times, trends, as we know, can last longer than we think they could or should. And that's one particular indicator that I'm paying close attention to nowadays, because if it starts to work again, that could tell us that the trend that has been with us now, if you go back to even October 2022, could be shifting. Because looking at that and any other indicator that's saying we're overbought hasn't really helped that much.

8:43And that's fine, but we have to understand what it's telling us. It's telling us that price action remains strong. And there are some signals that can end up being very helpful, but only after the fact. So it's very difficult to pinpoint a top from that perspective. Now, Frank, I remember, you know, back in my Wall Street life, back in my Wall Street days, I had a boss back when I was in the investment management side of the business, and he used to talk about this idea that oftentimes it's easy to get into a trade, to get into some kind of an investment. But that equally, if not more important, was the exit strategy.

9:23at what point you were going to actually take the profits or take the losses, however they are, hopefully they're not a lot, but that the exit was sometimes more important than the entrance. So maybe can you address the time horizon that you're often looking at? Different types of traders and investors have different time horizons. Also, kind of how far do you look ahead? What exactly are your kind of frames of reference with regard to not just time, but what you actually have to see happen before you decide to either take profits or take hopefully modest losses on any given trade. Yeah. I mean, I would say, Dom, you're not the only one that suffers from that.

10:01In particular, just as an anecdote, I had a client one time, a hedge fund, that had two main principles. And I asked them, how do they split up their different job responsibilities? And they said, well, I buy the stock and he sells them. I was like, really? Yes, because they want to completely remove emotion. And if they talked to either one of them, they would probably say the opposite. That's how they did it. Talk about taking emotion out of it. I don't know, that probably has some arguments along the way. That's one way of actually, it's interesting strategy that I thought. Other than that, I probably heard this before, but you just have to pay attention to rules.

10:38Now, whatever they are, that's the only way really to remove emotion. And clients, especially retail clients now, have the ability to input trades on their trading systems. It does not have to be during market hours because oftentimes that's when emotions run high. So, you know, looking at it, if I'm looking at a stock, I identify a breakout zone. I will wait for that breakout actually to take place for buying. And then, again, from my technical perspective, it's not really a stop loss percentage. It's looking at the chart and believing if this structure, whether it's an inverse head and shoulders pattern, and come up and handle whatever label you want to put on it.

11:19If that structure remains intact, I will remain in the trade. If that chart pattern is broken, that's the indication you get out from a trading perspective. Now, the great thing with technical analysis is that it can be applied across different time horizons. So you can have a day trader looking at the same patterns, and you can have someone just caring about the biggest trends there are out there. The same strategy can be applied. You just have to understand that you're doing with potentially much bigger drawdowns if you're looking at it from a much longer perspective. I got you. So, I mean, we're going to take a look at some of these longer term themes that have been playing out in the market and specifically some of that mega cap technology trade and maybe the lightning rod stock of them all these days, which is NVIDIA.

12:03But we'll get to that in a little bit. I wonder if you could bring us through a career in technical analysis and maybe some of the lessons that you've learned, the things that you've been able to take from watching the charts, looking at historical data, trying to glean something about the future, and whether or not that's translated into your personal and professional life in different ways besides just stocks, bonds, currencies and commodities and maybe crypto these days. Right. Well, I think one of the biggest things from a risk management perspective is realizing that oftentimes stocks do not athlete companies, meaning that there's a distinct difference.

12:40especially, I would go back to 2022, where things, of course, were rolling over and argue that the fundamentals of many companies didn't really change that much, but stock prices did, where, of course, the reverse has been happening now for almost two years, especially over the last number of months. And I think that's why something like technical analysis can come in handy because if you're looking at fundamental analysts, and I worked hand-in-hand with a sell-side fundamental analyst at my last job. And oftentimes I would ask them, you know, I'm noticing something happening in X stock. It may be due for a pullback.

13:18I know you have a buy rating on it. Would it be okay if I wrote a note on it? And most of the time, the answers I got were, please do, because then that will help people stop asking me questions about the stock because the thesis hasn't changed. But at the same time, you don't want to miss a 20 % or 30 % move in between earnings announcements. And that's the most important thing, where some of the biggest clients I have are strictly focused on fundamentals. But they understand the fact that they need to see the other side as well, and most importantly, respect it. And I think that's where it really comes in handy.

13:56Well, that's the interesting point as well, because oftentimes the technical analysis, the chart side of things, there are pure technicians out there, no doubt. But oftentimes traders and portfolio managers will use that as a factor, you know, one particular component of a model to determine whether or not an investment looks attractive or not attractive or timing when to get in or out. I kind of feel as though there is something that you can take away from that kind of a lesson or that kind of a construct. Maybe address a little for our listeners and viewers how they can apply technical analysis more effectively in their decisions.

14:35I mean, what advice would you give maybe specifically for those who are maybe just starting out with trying to understand the charts or get into technical analysis or get some more experience into how to analyze those charts and how to actually make decisions based off of them? I think, number one, it can be overwhelming. In fact, just a few weeks ago, I played a little game, which was asking ChatGPT to list 100 technical indicators. No problem. List 100 more. Certainly. List 100 more. Here you go. So 300 technical indicators. I don't think we need all of them. There's probably more than that.

15:12And so I would say this. Going through the CMT process, chartered market technicians process, really helped me because, first of all, you get exposed to a lot. But you quickly understand what works for you. And so I think going through some of those, looking at some of the pieces that I've written, as my colleagues have wrote as well, you get an understanding of what makes sense to us and for the reasons why. And I would say looking at that from your own perspective, you understand as well. At the very least, maybe just put some moving averages on there just to understand those sometimes can act as resistance and support.

15:50Sometimes you're just very good at determining the trend as well. And then, of course, there are some indicators too. But getting back to what we talked about earlier, also pay attention to how those indicators moving averages work in regards to different market environments that we're in right it's because that's going to be the most important thing cnbc pro talks is a monthly interview series that's part of cnbc's premium subscription service cnbc pro to hear the full pro talk interview including specific stock picks and investment strategies, listeners can subscribe to CNBC Pro at cnbc.com slash protalks.

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