Joined Nov 11, 2007
1,458 Blog Posts

Testing Out the Honey Hole

The Honey Hole is a setup coined by yours truly that has proven to be a good short setup for individual stocks. How well does it work on the indices?

To be clear, I’ve coded this setup to model the very recent S&P 500 action. It doesn’t exactly match the Honey Hole setup that I use for individual stocks.

The Honey Hole is a bearish setup where a stock rises X% over a long time (six months or more) and then falls beneath its 50 day moving average, bounces, and then comes to rest X% beneath the 50 day moving average. It is similar to the short setup popularized by William O’Neil in How to Make Money Selling Stocks Short.

To model recent action, here is the buy criteria:

  • Close is less than the open
  • Close is beneath the 50 day moving average
  • Close is less than 3% beneath the 50 day moving average
  • 5 day rate-of-change is greater than 0.5%
  • All buys and sells made at the close with no commissions or slippage included

I tried out requiring the index to be above the 50 day moving average 10 days ago, but it resulted in a small sample size.


Note: I added the QQQQ to this test but its recent action is similar but not exact to what was modeled for SPY.

Over the short term, results are neutral to mildly bearish. After an initial bounce, the intermediate term results are neutral to mildly bearish for QQQQ and neutral to mildly bullish for SPY.

While it is hard to fight the fact that markets tend to go up over time (as almost all of these tests show), once the market is trading beneath the 50 day moving average, the momentum has worn off, or is in the process of wearing off. A market not encumbered by trading beneath the 50 day moving average should be expected to have gained 2% or more 50 bars later. These tests show the market unable to meet this benchmark.

Most of the time, markets trading beneath the 50 day moving average will consolidate and re-take the average. The question that should be asked is when should we NOT expect the market to re-take the average?

Bottom line: I’m not seeing enough evidence to make me excited to take a stand on either side, long or short. It looks like consolidation and mild volatility is the best bet for the short term.

To see a what the Honey Hole looks like on a chart, be sure to see Gilbert’s post in the Peanut Gallery.

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  1. xxxHuggieBearxxx

    I have tried and struggled to design/build mechical trading systems that are profitable on the short side for indexes and broad-based ETFs (and also commodity futures). I havent had much luck, primarily due to the upward drift of such instruments over time. I have made a few that are slightly profitable and serve as a decent hedge/volatility decreaser when paired with a long-only mechanical system.

    I am thinking it might be more feasible on individual company stocks but i haven’t tried that yet.

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  2. thewife

    I am curious to know your response to Mushroomz comment on Gilbert’s post.

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    • Woodshedder

      thewife, I will address that sometime soon. Really, I just need to run the tests. Opinion/intuition will not be that helpful.

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  3. checklist

    it is more bearish than nearly any of the other similar charts you’ve posted.

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