What Is a Dull Market?
A dull market is a market where there is little activity or price movement. A dull market is characterized by low trading volume and tight daily trading ranges. There is little price change and action during a dull market, making it an example of a sideways market.
- A dull market is characterized by an extended period of low volume and small price changes.
- A dull market may indicate the market is taking a breather before advancing again during an uptrend. An upside breakout from the dull market helps confirm this.
- A dull market may also occur after a long price decline. The dull market indicates buyers and sellers are moving back into balance. Bottoming patterns like this can take months to form and must be followed by an upside move.
What Does a Dull Market Tell You?
During a dull market, some investors feel that once the market awakens, the market is generally set to rise. Any moves after a dull market tend to be larger moves due to the prior lack of activity.
While a dull market may end with the price moving higher, that is not always the case. The price could also move lower following a dull period.
Some traders and investors opt to avoid making trades during dull markets, and instead begin trading once the price breaks out of the dull market. Other traders look at the dull period as a time to get involved in trades because they prefer making decisions when the market is quiet, making smaller moves, and less volatile.
Large institutions that want to accumulate a large number of shares may do so slowly during a dull market, so not to bid up the price unnecessarily. More buyers or sellers stepping in could push the price higher or lower, out of the dull market into a trend.
Investing in Dull Markets
A dull market gives way to complacency, which can cause problems for even savvy investors. The complacency that goes hand in hand with a dull market could get investors into trouble if they don't understand where the market is in relation to its longer-term trend. Looking at where the dull market occurs within the longer-term price action of a security may help that trader decide how they want to proceed.
A flat base, which is how a dull market looks on a chart, is one of the chart patterns that momentum stocks form before they make substantial price advances. While it may seem like a stock is stagnant for weeks or months, it may be quietly winding itself up for a big climb.
Investors and traders should look for these favorable characteristics from a dull market, which may indicate a future upward run.
- After a prior advance, the stock declines a modest amount; no more than approximately 20% from its prior high.
- A tight consolidation takes place over approximately three weeks or longer.
- Often a flat base develops after a stock breaks out of a cup with handle or other sound base, and climbs 20% or more from the cup and handle breakout level.
These ideas were discussed in the bestselling book How to Make Money in Stocks, by William O'Neil.
When a stock is going through a dull period, it is quite likely that institutional investors are buying shares, adding to their positions carefully in order to not run up the price too quickly.
A dull market may also occur when a security has fallen and is now leveling off. The dull market may be a sign that selling pressure has been matched by buying pressure. A dull market, after a selloff that transitions back into an uptrend, is called a basing or bottoming pattern.
Bottoming patterns tend to occur over longer periods of time and may take multiple months to fully develop and start moving higher. This can often dishearten those traders who buy into the dull market or potential bottom early.
Real-World Examples of a Dull Market in a Stock
This daily chart of Dexcom Inc. (DXCM) shows three periods where the stock experienced a dull market. During these periods there was little movement, little progress in the price overall, and volume was lower much or all of the time during these periods.
The chart also shows when the price developed a larger rectangle pattern. This could also be considered a dull market, but notice how this larger pattern is quite different from the smaller patterns. During the larger rectangle, there are still frequent large daily price moves, the price is covering a larger area, and there were several days of high volume.
During the smaller dull markets, the volume is low until the price breaks out of the dull market. Also, daily price ranges and the overall price area covered are relatively small.
The Difference Between a Dull Market and Bear Market
A dull market has little activity, but also little price movement. A bear market has lots of activity, dominated by selling and falling prices. A bear market is when prices are declining, making lower swing lows and lower swing highs. Bear market is a term describing a large downtrend.
Pros and Cons Of a Dull Market
The downside of a dull market is that it provides little profit potential for active traders such as day traders and swing traders, unless they are willing to trade within the small price range repeatedly.
The flip side of this is that a dull market can present an opportunity to accumulate or unload a large position slowly, without affecting the price much. This requires precision, because with lower volume big buy or sell orders could jostle the security out of the dull market or attract other players.
Dull markets are neither good nor bad. They are simply a pattern that occurs from time to time in all markets.