The blue bird flies again! Shares of Twitter (TWTR) are soaring this week following reports from CNBC and Bloomberg that Mickey Mouse, Salesforce.com, and the Googster are expressing interest in acquiring the company.

The embers of a stock recovery were already being stoked. Now we have a full on bullish bonfire in TWTR. At $23, the stock is up 67% since carving out an all-time low of $13.73 in May. Twitter’s price chart is a great case study of how stock’s typically bottom. First, downside momentum slows and moving averages flatten out. High volume down days (distribution) dries up as selling pressure abates. Then, the sentiment turns. Rallies lengthen while selloffs shorten. Resistance levels start to give way as a bona fide uptrend takes root. The 20-day moving average turns higher first, followed by the 50-day and, eventually, the 200-day.

Another lesson embedded in the ongoing Twitter saga is how stock prices of good companies simply don’t go to zero. Perhaps you too have heard the sermon preached by passive peacocks that stock prices (in aggregate) eventually recover. I never really read a satisfying answer until I came across it hidden in one of my all-time favorite books on stock investing, Simple Wealth, Inevitable Wealth.  Here’s the explanation:

“Left to its own devices, the free marketplace ultimately heals itself, because the companies operating in such a system respond rationally to signals from the consumer.  In adverse economic times, superior companies have the wit as well as the resources to stay the course.  They can temporarily lay off workers and shutter plants to preserve cash. They have the borrowing power to invest in new plant, equipment and technology.  They have the financial flexibility and pricing power to take market share from their weaker competitors, to absorb them, and even to drive them out of business.  Thus the total value of the shares of great businesses will go down when the economy contracts. But- and this is critical- it’s never stayed down.

The natural law of a free economy – and of the value of the thriving companies which shape and are shaped by such an economy – is one of permanent advance punctuated cyclically by temporary decline.  It was ever thus.  A line drawn between the peaks and valleys of our economic life (and therefore of stock prices) always has a relentless upward bias.  Let me say once more, because it’s this chapter’s mantra: the advance is permanent; the declines are temporary.  Consult everything you know or can learn about history and you’ll find this view borne out.”

Now, back to Twitter. If the shares of a semi-decent company dive bomb into the abyss they aren’t necessarily destined for bankruptcy. At some point potential acquirers will begin to take notice of the fire sale. If individual traders don’t recognize the opportunity being created by ultra-low prices, other companies with far more financial power and business savvy will.

Admittedly, knowing when the price of a good company has fallen far enough to attract potential suitors is incredibly tricky. Apparently, for Twitter the price was $15 to $20.

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