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It can't be "packing down" if it's not moving for any of the small bumps though, right?
It will be running at sag though, i.e. partially compressed. It might be that the parameters mean there's too much resistance to further movement at that point because there's too much drag thanks to compression damping or too much resistance thanks to negative to positive air ratio or not recovering high enough in the stroke due to too much rebound damping etc etc
tl;dr it should feel like there is an air bubble under your hands. At least, that's what a well set up short(ish) travel fork feels like to me. For short travel and small bump sensitivity, sack off the rebound and compression damping and err towards too much preload. This will encourage the fork to return to a spot where it can react to small bumps due to the high ratio of negative to positive spring or something
If you don't know you probably don't have it.
In that case, drop all the rebound damping and see how it feels. Even try adding a touch more pressure. It might be that it's packing down and can't rebound to a point where it can react to small impacts again. If it feels OK with less (or more!) pressure start to dial the rebound back in.