Basically there are 4 stages of Market Cycle / Stock:
Stage 1. Accumulation by smart money
Stage 2. Trending up (bullish)
Stage 3 Distribution by smart money (topping out)
Stage 4. Decline (bearish).
Not all stocks are at the same stage at the same time. They market may go by sectors or industries.
Typically the blue chips are the first to emerge from a market bottom into Stage 2 while the penny stocks may start to run when the blue chips are starting to churn at the top.
Stage 1
Came about after a prolonged downtrend when the stock has bottomed out. Sellers are no longer interested in selling and some "value" buyers have come in. But basically the stock can drift sideways for a long time until there is enough impetus to propel it into a new trend.
Stage 2
Usually just before the stock breaks into Stage 2, there is some stealth accumulation by smart money These are usually investors who are "in the know". Perhaps the company is finally turning around or has some angel investors coming in. Mostly likely the the volume has been steadily increasing for several weeks and finally it broke decisively up!
However, in early Stage 2, no one will believe the breakup is for real! The fundamentals being reported are likely to be still bad, the outlook still sucks.
But by late Stage 2, the picture is very different, everyone is talking and dreaming about these stocks and how easy it is to make money. The media is likely giving it lots of coverage too.
Stage 3
Finally the stock begins to churn sideways as the smart investors who bought early is slowly selling the stock (which is likely way overpriced by now and with fundamentals already priced in and appears stretched).
Stage 4
It may start with a sharp or slow decline. Everyone believes it is only a temporary correction. The fundamentals are probably still good. "Sucker's rally" happen along the way to give suffering investors renewed hope, and they may even average down! After a short relief, the stock declines further, the pain intensifies and finally there is panic selling, especially when it is near the bottom. When all hopes are lost and sellers have finally cut or given up selling, the market hits bottom and finally drifts into Stage 1 again.
Well, the above are the textbook scenarios. There are times when the stages are just not so easy to identify and we will probably have swing trade for smaller profits rather than attempt to hit (or hope for) a home run. Hence we need to be flexible as well.
However, when I do see a stock with clear staged 1 formed and has just moved into Stage 2, with all the criteria in place, then I will hang on for a bigger ride (with trailing stops in place).
