Price surges within a confined period tell us that a stock is under heavy accumulation and is likely to rise. This is especially true if the company fundamentally is sound.
Autozone met all of our fundamental criteria when it began a surge in late 2008 to make an all-time high and touch off a juggernaut surge (see “Power surge,” below). Sometimes patience is needed as these are rare and long-term set-ups.
These sudden price surges are a simple result of supply and demand forces. If demand is high, then limited availability results in a frenzy of buying as the stock’s volume begins to spike higher and the stock goes on to new all-time highs. This buying frenzy is the result of institutional sponsorship where large banks and mutual funds take interest in a given stock.
When a stock’s price is low, many mutual funds or investment houses won’t invest in it because their investment mandate may preclude the consideration of low-priced issues or their particular value model has not yet identified the company as sound. However, in the ideal scenario, once one of the major players begins accumulating shares, it creates a domino effect. The higher the price, the more buying criteria it meets, resulting in a cascade of buying. This buying feeds upon itself, and a legion of buyers carries the stock upward.
The golden key to this scenario is the strong initial surge in price value on the weekly and monthly time frames. That is the catalyst to setting off the chain reaction. That 50% (or greater) rise within an eight-week week period is critical.