CHAPTER SEVEN Dull Markets and Their Opportunities

MANY people are apt to regard a dull market as a problem for trading purposes. They claim: "Our hands are tied; we can't get out of what we've got; if we could there'd be no use getting in again, for whatever we do we can't make a dollar".

Such people are not Tape Readers. They are Sitters. As a matter of fact, dull markets offer innumerable opportunities and we have only to dig beneath the crust of prejudice to find them.

Dullness in the market or in any special stock means that the forces capable of influencing it in either an upward or a downward direction have temporarily come to a balance. The best illustration is that of a clock which is about run down - its pendulum gradually decreases the width of its swings until it comes to a complete standstill, like this:

Turn this diagram sideways and you see what the chart of a stock or the market looks like when it reaches the point of dullness:

These dull periods often occur after a season of delirious activity on the bull side. People make money, pyramid on their profits and glut themselves with stocks at the top. As every one is loaded up, there is comparatively no one left to buy, and the break which inevitably follows would happen if there were no bears, no bad news or anything else to force a decline.

Nature has her own remedy for dissipation. She presents the debauch with its start, its climax and its collapse, with a thumping head and a moquette tongue. These tend to keep him quiet until the damage can be repaired. So with these intervals of market rest. Traders who have placed themselves in a position to be trimmed are duly trimmed. They lose their money and temporarily, their nerve. The market, therefore, becomes neglected. Extreme dullness sets in.

If the history of the market were to be written, these periods of lifelessness should mark the close of each chapter. The reason is: The factors that were active in producing the main movement, with its start, its climax and its collapse, have spent their force. Prices, therefore, settle into a groove, where they remain sometimes for weeks or until affected by some other powerful influence.

When a market is in the midst of a big move, no one can tell how long or how far it will run. But when prices are stationary, we know that from this point there will be a pronounced swing in one direction or another. There are ways of anticipating the direction of this swing. One is by noting the technical strength or weakness of the market, as described in a previous chapter. The resistance to pressure mentioned as characteristic of the dull period in March, 1909, was followed by a pronounced rise, leading stocks selling many points higher. This was particularly true of Reading, in which the shakeouts around 120 (one of which was described) were frequent and positive. When insiders shake other people out it means that they want the stock themselves. These are good times for us to get in. When a dull market shows its inability to hold rallies, or when it does not respond to bullish news, it is technically weak, and unless something comes along to change the situation, the next swing will be downward. On the other hand, when there is a gradual hardening in prices; when bear raids fail to dislodge considerable quantities of stock; when stocks do not decline upon unfavourable news, we may look for an advancing market in the near future.

No one can tell when a dull market will merge into a very active one, therefore the Tape Reader must be constantly on the watch. It is foolish for him to say: "The market is dead dull. No use watching it today. The leaders only swung less than a point yesterday. Nothing profitable can happen in such a market". Such reasoning is apt to make one miss the very choicest opportunities - those of getting in on the ground floor of a big move.

For example: During the previous mentioned accumulation in Reading, the stock ranged between 120 and 124 1/2. Without warning, it one day gave indication (around 125) that the absorption was about concluded, and the stock had begun its advance. The Tape Reader having reasoned beforehand that this accumulation was no small investors game, would have grabbed a bunch of Reading as soon as the indication appeared. He might have bought more than he wanted for scalping purposes, with the intention of holding part of his line for a long swing, using the rest for regular trading. As the stock drew away from his purchase price he could have raised his stop on the lot he intended to hold, putting a mental label on it to the effect that it is to be sold when he detects inside distribution.

Thus he stands to benefit to the fullest extent by any manipulative work which may be done. In other words, he says: "I'll get out of this lot when the big boys and their friends get out of theirs". He feels easy in his mind about this stock, because he has seen the accumulation and knows it has relieved the market of all the floating supply at about this level. This means a sharp, quick rise sooner or later, as little stock is to be met with on the way up.

If he neglected to watch the market continuously and get in at the very start, his chances would be greatly lessened. He might not have the courage to take on the larger quantity. On Friday, March 26, 1909. Reading and Union were about as dull as two gentlemanly leaders could well be. Reading opened at 132 3/4, high was 133ź, low 132ź, last 132 5/8. Union's extreme fluctuation was 5/8! - from 180 5/8 to 181ź. Activity was confined to Beet Sugar, Kansas City Southern, etc. The following day, Saturday, the opening gave every indication that the previous day's dullness would be repeated, initial sales showing only fractional changes. Let's see B. & 0., Wabash pfd. and Missouri Pacific were up 3/8 or 1/2. Union was an 1/8th higher and Reading 1/8 lower. Beet Sugar was down 5/8, with sales at 32. Reading showed 1100 @ 132ź, 800 @ 3/8, Union 800 @ 181, 400 @ 181, 200 @ 181 1/8, 400 @ 181. A single hundred Steel at 45˝ 1/8. B& O 100 @ 109 7/8.

Market dead, mostly single 100 share lots Ah! Here's our cue! Reading 2300 @ 132˝., 2000 @ ˝, 500 @ 5/8. Coming out of a dead market, quantities like these taken at the offered prices can mean only one thing, and without argument the Tape Reader takes on a bunch of Reading "at the market." Whatever is happening in Reading, the rest of the market is slow to respond, although N. Y. Central seems willing to help a little 500 @ 127˝ (after ). Beets are up to 33ź. Steel is 45 1/8, and Copper 77 ź -a fraction better. Reading 300 @ 132/2. Steel 1300 @ 45 1/8, ź Union 100 @ 181 Reading 300 @ 132 5/8 Beets 100 @ 33˝. Union 700 @ 181˝ N.Y. Central 127 5/8, 600 @ 7/8!There's some help coming! Union 900 @ 181˝ now Reading 100 @ 132 3/4. Copper 700 @ 71˝. Reading 800 @ 132 7/8, 100 @ 133, 900 @ 133, 1100 @ 1/8... Reading 1500 @ 133ź , 3500 @ 133 not much doubt about the trend now.

The whole market is responding to Reading, and there is a steady increase in power, breadth and volume. The rapid advances show that short covering is no small factor. It looks as though a lot of people are throwing their Beet Sugar and getting into the big stocks. St. Paul Copper and Smelters begin to lift a little. Around 11 A.M. there is a brief period of hesitation, in which the market seems to take a long breath in preparation for another effort. There is scarcely any reaction and no weakness. Reading backs up a fraction to 133ź and Union to 181 3/8. There are no selling indications, so the Tape Reader stands by his guns. Now they are picking up again Reading 133 3/8, ˝, 5/8, Union 181 5/8 N.Y. Central 128˝ 1/8, 700 @ ź, Union 1000 @ 181˝, 3500 @ 5/8, 2800 @ 7/8, 4100 @ 182 Steel 45 ˝. From then right up to the close it's nothing but bull, and everything closes within a fraction of its highest. Reading makes 134 3/8, Union 183, Steel 46 1/8, Central 128 7/8, and the rest in proportion. The market has gained such headway that it will take dire news to prevent a high, wide opening on Monday, and the Tape Reader has his choice of closing out at the high point or putting in a stop and taking his chances over Sunday.

So we see the advantage of watching a dull market and getting in the moment it starts out of its rut. One could almost draw lines on the chart of a leader like Union or Reading (the upper line being the high point of its monotonous swing and the lower line the low point) and buy or sell whenever the line is crossed. Because when a stock shakes itself loose from a narrow radius it is clear that the accumulation or distribution or resting spell has been completed and new forces are at work. These forces are most pronounced and effective at the beginning of the new move - more power is needed to start a thing than to keep it going.

Some of my readers may think I am giving illustrations after these things happen on the tape, and that what a Tape Reader would have done at the time is problematical. I therefore wish to state that my tape illustrations are taken from the indications which actually showed themselves when they were freshly printed on the tape, at that time I did not know what was going to happen.

There are other ways in which a trader may employ himself during dull periods. One is to keep tab on the points of resistance in the leaders and play on them for fractional profits. This, we admit, is a rather precarious occupation, as the operating expenses constitute an extremely heavy percentage against the player, especially when the leading stocks only swing a point or so per day. But if one chooses to take these chances rather than be idle, the best way is to keep a chart on which should be recorded every fluctuation. This forms a picture of what is occurring and clearly defines the points of resistance, as well as the momentary trend.

In the following chart the stock opens at 181ź and the first point of resistance is 181˝. The first indication of a downward trend is shown in the dip to 181 1/8, and with these two straws showing the tendency, the Tape Reader goes short "at the market," getting, say, 181ź (we'll give ourselves the worst of it). After making one more unsuccessful attempt to break through the resistance at 181˝, the trend turns unmistakably downward, as shown by an almost and broken series of lower tops and bottoms.

These indicate that the pressure is heavy enough to force the price to new low levels, and at the same time it is sufficient to prevent the rally going quite as high as on the previous bulge. At 180 1/8 a new point of resistance appears. The decline is checked. The Tape Reader must cover and go long - the steps are now upward and as the price approaches the former point of resistance he watches it narrowly for his indication to close out.

This time, however, there is but slight opposition to the advance, and the price breaks through. He keeps his long stock. In making the initial trade he placed a "double" stop at 181 5/8 or 3/4, on the ground that if his stock overcame the resistance at 181 1/2 it would go higher and he would have to go with it. Being short 100 shares, his double stop order would read "Buy 200 at 181 5/8 stop". Of course the price might just catch his stop and go lower. These things will happen, and anyone who cannot face them without becoming perturbed had better learn self-control.

After going long around the low point, he should place another double stop at 180 or 179 7/8, for if the point of resistance is broken through after he has covered and gone long, he must switch his position in an instant. Not to do so would place him in the attitude of a guesser. If he is playing on this plan he must not dilute it with other ideas.

Remember this method is only applicable to a very dull market, and, as we have said, is precarious business. We cannot recommend it. It will not as a rule pay the Tape Reader to attempt scalping fractions out of the leaders in a dull market. Commissions, taxes and the invisible eighth, in addition to frequent losses, form too great a handicap. There must be wide swings if profits are to exceed losses. and the thing to do is wait for good opportunities. "The market is always with us" is an old and true saying. We are not compelled to trade and results do not depend on how often we trade, but on how much money we make.

There is another way of turning a dull market to good account, and that is by trading in the stocks which are temporarily active, owing to manipulative or other causes. The Tape Reader does not in the care a bit what sort of a label they put on the goods. Call a stock "Harlem Goats preferred" if you like, and make it active, preferably by means of manipulation, and the agile Tape Reader will trade in it with profit. It doesn�t matters to him whether it's a railroad or a shooting gallery; whether it declares regular or "Irish" dividends; whether the abbreviation is X Y Z or Z Y X - so long as it furnishes indications and a broad liquid market on which to get in and out.

Take Beet Sugar on March 26, 1909, the day on which Union and Reading were so dull. It was easy to beat Beet Sugar. Even an embryo Tape Reader would have gone long at 30 or below, and as it never left him in doubt he could have dumped it at the top just before the close, or held it till the next day, when it touched 33˝.

On March 5,1909, Kansas City Southern spent the morning drifting between 42 3/4 and 43 1/2. Shortly after the noon hour the stock burst into activity and large volume. Does any sane person suppose that a hundred or more people became convinced that Kansas City Southern was a purchase at that particular moment? What probably started the rise was the placing of manipulative orders, in which purchases predominated. Thus the sudden activity, the volume and the advancing tendency gave notice to the Tape Reader to "get aboard." The manipulator showed his hand and the "get aboard" Tape Reader had only to go long with the current.

The advance was not only sustained, but emphasized at certain points. Here the Tape Reader could have pyramided, using a stop close behind his average cost and raising it so as to conserve profits. If he bought his first lot at 44, his second at 45, and his third at 46, he could have thrown the whole at 46 5/8 and netted $406.50 for the day if he were trading in 100 share units, or $2,032.50 if trading in 50 share units.