Retail's Lucky Seven

On Monday, I discussed troubling issues facing America's retailers as we head toward the holiday season. Today I want to look at the strongest members of this broad sector.

Stocks that outperform during hard times usually lead the market when their brethren stabilize and move higher.

Retailers are oversold after their two-month decline and could start an extended bounce soon.

I scanned my database to find the seven strongest retail stocks. These are the select issues with products so much in demand that sector malaise hasn't stopped consumers from ringing their cash registers.

Today's list of bull picks will get folks ready to take advantage of that rally, if and when it comes.

Building Materials (BMHC - commentary - Cramer's Take) sells building products and construction services. The stock tagged a new high just after Hurricane Katrina slammed the Southeast and then dropped into an orderly triangle pattern. Price is now approaching the rally high at $99 and should move substantially higher once it gets above resistance at "round number" $100.

Wild Oats Markets (OATS - commentary - Cramer's Take) started as a new-age supermarket but now appeals to the broad demographic looking for high-quality food products. The stock has spent the last two months pulling back from its August high at $14.14. It tested the 50-day moving average three times and bolted above this level on heavy volume last week. This suggests that the correction is over and that price will challenge the rally high soon.

Long's Drug Stores (LDG - commentary - Cramer's Take) rallied into its 1998 high in July and pulled back. It's been bouncing along the 50-day moving average since that time. The stock jumped back above this key support as last week ended. The recovery should continue, but upward progress may slow near the red line. Traders can profit from this swing, but most folks should wait until price rallies through the summer highs.

Office Depot (ODP - commentary - Cramer's Take) jumped to an all-time high this summer, after a well-respected CEO took the helm. The stock hit its latest peak last month and pulled back to test the 50-day moving average. Price jumped off this level two weeks ago and has been basing below $30. Look for it to test the rally high and then drop to current levels before breaking out.

Tiffany's (TIF - commentary - Cramer's Take) shows a buying pattern last seen during the long bear market. It's outperforming other retail stocks because investors believe luxury products will find solid buying interest on any economic downturn. It hit a rally high on Monday and looks like the most compelling retail play of the upcoming holiday season.

JoS. A. Bank Clothiers (JOSB - commentary - Cramer's Take) has been moving higher in a strong uptrend for over five years. It tagged its recent high in late July and pulled back with the broad sector. After an August breakdown, the stock jumped above the 50-day moving average and started to move sideways. Strong monthly numbers in this week's chain-store sales data could lift price toward the summer highs.

Urban Outfitters (URBN - commentary - Cramer's Take) hit an all-time high in late July, like many stocks in the retail sector. The subsequent decline reached the 200-day moving average two weeks ago, where it found strong buying interest. The recovery started just three days before the company completed a 2-for-1 stock split. The uptick should continue and run to new highs sometime in the fourth quarter.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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