What the Charts Hold for the Retailers

This column was originally published on RealMoney on April 16 at 12:03 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

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Same-store sales data reported last week confirmed strong results for America's retailers.

The upbeat news was widely expected, given supportive March weather and an Easter holiday falling a week earlier than it did in 2006.

But the results still confirmed that consumers are holding their own, despite growing fears of a slowing economy.

Wall Street greeted Thursday's positive news with quick selloffs in many popular storefront names.

This negative reaction pointed to fears that April comparisons will be more difficult, given the absence of the time-shifted holiday.

Sector issues recovered into the weekend, but still underperformed the major indices by a wide margin.

The culprits weighing down the retail sector are easy to itemize.

Higher gas prices, tightening credit and strong dependence on favorable Forex rates are all keeping a lid on the group's upside progress.

But the American consumer hasn't flinched yet, despite the negatives, and could eventually win over the hearts and minds of skeptical analysts.

The Retail HOLDRs Trust (RTH Quote) has been running in place since the February selloff knocked it off multiyear highs. Notably, it's still trading below the Asia-driven gap, even though the S&P 500 index has regained 100% of this lost territory. On-Balance Volume also reveals active distribution that looks far more bearish than the price bars.

But there isn't enough evidence yet to predict sector upside or downside in the second quarter. In sum, it looks like the group has entered a holding pattern ahead of earnings, waiting to see how leadership stocks fared during the coldest months of the year. A bull or bear consensus might develop after the bulk of these confessionals hit the newswires.

The retail space will remain a stock-picker's market until that happens, where a handful of independent plays are attracting the bulk of speculative capital. In this regard, let's identify the group's most promising components and see whether they deserve consideration for your portfolios.

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Zumiez (ZUMZ Quote) rallied to an all-time high in July of last year and pulled back. It returned to this level in January and ground sideways in a volatile pattern for two months before breaking out on strong volume in mid-March. That rally stalled a week later, with price bouncing ominously along the breakout level since that time.

It looks like the stock wants to fill the breakout gap at $37.40. This would also test key support at the 50-day moving average. This decline would mark a limited breakdown that's likely to shake out a good share of recent buyers. But that key level could also mark a sustainable low that sets up a strong run over the rally high at $42.60.

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Chico's FAS (CHS Quote) rose in a steady uptrend between 1997 and February 2006 when it dropped into the deepest correction in its history. That downtrend finally bottomed out at $17.26 last August, with the stock grinding sideways in an ascending triangle base until it gapped out of the pattern on strong volume last week.

It looks like the long decline has finally come to an end, placing this issue firmly on the recovery trail. But expectations need to be tempered by the layers of resistance that price must overcome before returning to the historic high. A reasonable profit target in the shorter term lies within the boundaries of the May 2006 selloff between $33 and $36.

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Rite Aid (RAD Quote) has been a major underperformer since its bear-market decline bottomed out at $1.50 in late 2000. The good news is it's finally showing the upside potential that attracts strong capital inflows. The stock rallied above three-year resistance at $6.50 last week, completing a long-term cup-and-handle breakout.

This move sets the stage for an uptrend that could reach secondary resistance between $9.50 and $10 in the second quarter. That would offer an excellent percentage gain from recent closing levels. However, caution is advised in the short term. Last week's rally spike looks unsustainable, so a pullback that reaches $6 to $6.25 might offer a better entry point.

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Aeropostale (ARO Quote) shows an exceptionally strong uptrend, but it still needs to be avoided at all costs. The stock is printing out a classic rising wedge at a new high, after breaking out above multiyear resistance at $35. Price has lifted eight points above that level, but has now arrived at the narrow apex of the bearish pattern.

Rising wedges kill rallies because each new high comes on declining momentum. This sets up a fragile scenario in which one selloff day will undo many weeks of progress and leave many shareholders sitting in losing positions. The downturn often begins just as price squeezes tightly between wedge support and resistance, like it is right now.