Getting a Foothold in the Next Rally

 | Jun 08, 2012 | 11:30 AM EDT
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As encouraging as Wednesday's rally was for bulls, it's still too early to call a new market uptrend. Most new market-wide uptrends need longer to prove themselves before they can confirm the bull run -- and, even then, they frequently lead to a reversal lower again, with a rally attempt resulting in a failure.

Nonetheless, running scans for upside price movers in high volume is an excellent way to get in position for the next market uptrend, whenever it does emerge.

A little-known, Luxembourg-based company from the financial sector has been a solid upside mover this week, although it was pulling back slightly in Thursday trade. Altisource (ASPS), which sells services and software for real estate portfolio management, was spun off from Ocwen Financial (OCN) in August 2009. Altisource shares closed at $7 on their first day of trading, and they've advanced more than 800% since then. The stock is now trading just below $64.

Altisource bolted 5.7% Tuesday in 2.5x average volume. It tacked on another 2.3% on Wednesday, also in above-average turnover.

This is yet another example -- and there are many -- of relatively unknown, smaller stocks that have begun trading in the past few years, and have notched significant price gains since then. While much of the financial media obsesses over the fate of Facebook (FB), stocks like Altisource can sneak in under the radar and deliver solid gains for investors.

The stock has been forming a fairly orderly price consolidation since early February. It cleared intermediate resistance above $63. In a bull market, it would be a buy candidate at this time.

But, in the absence of a confirmed uptrend on the major indices, it's best to hold off on new long positions, as it's all too common for stocks that have shown institutional buying to get dragged lower in a fresh selloff.

Another smaller financial-services stock that made a heavy-volume upside move this week was debt collector Encore Capital Group (ECPG). This is a business that plenty of consumers love to hate -- but the stock, which has yet to bounce back after the August 2011 market meltdown, could be showing signs of life.

I don't, as a rule, buy beaten-down stocks that are well below prior highs. But that doesn't mean it's not a good idea to track names that are attempting to break out of bases or consolidations. Many traders miss out on some of these opportunities because they'll write off a stock entirely as it consolidates. Even a name that has consolidated for a seemingly long time -- as is the case with Encore -- can bounce back and notch hefty gains.

The company last reported earnings May 9, so it's not expected to report again until early August. As a result, the stock will not have that news as a catalyst for a sharp move, whether up or down, for quite some time. The company is expected to show double-digit earnings increases in each of the next two years.

Encore shares leapt 4.9% Thursday as the general indices struggled. When a stock sports bullish price action that defies a weak market, that is a potentially good sign.

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