They say you should never short a dull market, and for good reason. When markets are unusually slow they are also often dominated by smaller investors, who never usually even consider the short side of the market. Smaller investors are traditionally long-only; at least they have been for the past 20 years while I have been paying attention.
On the other side of the coin, a dull market also gives way to complacency, and that could be something that can hurt even very intelligent institutional level investors. The complacency that goes hand in hand with a dull market could get investors into serious trouble if they don't understand where the market is in relation to its longer term trends.
I understand the notion of not shorting a dull market, but which is more important, the fact that the market is moving slowly or the fact that the market is at a longer term level of resistance?
In my book, there is one clear dominating factor given the two options above and that is the fact that the market is near longer-term resistance. If the market were not near these levels but also very dull, it might seem as if that old adage would be more dominant, but in rule based trading strategies that are governed by defined trading channels, this old adage does not play a role at all.
In my opinion, we should not be trying to understand whether or not a market is fast or slow, we should not be trying to understand whether or not the market is being governed by smaller investors or institutional investors on any given day, but instead we should be respecting the technical trading parameters that the market has provided to us and that should be what we use to govern our proactive, risk controlled decisions regardless of what conditions might otherwise seem to exist.
When markets are slow some investors give way to temptations and they make conscious decisions sometimes to let down their defenses. That is the biggest mistake an investor can make. It may not always be true, but when a slow market environment is coupled with a test of longer-term resistance levels, the risks become extremely high for those people who become complacent.
Clearly, no one knows for sure what will happen, but when the rules are followed that risk controls are respected, we will not be surprised and we will react appropriately, so we always keep our defenses up.
Again, although we cannot be sure what will happen from here, our Swing Trading Strategy recently closed a double long position in the NASDAQ (NYSEARCA:QLD) and when resistance was tested on Tuesday a double short position was engaged (NYSEARCA:QID).
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies mentioned herein for writing this article.