Spotting the Retail 'Story' Stocks

America's retailers hit a brick wall in April, reporting mediocre same-store sales across the board. After several months of strong numbers, the surprisingly weak data shocked the market, raising fresh doubts about the resiliency of the recovery. Investors should take notice of this adverse development, because the sector rally may be over.

The timing of the European crisis and "flash crash" couldn't be worse. Recent headlines could kill improving consumer sentiment, with renewed skepticism about the markets, the economy and our government officials. In turn, consumers are likely to put their spending plans on hold, in anticipation of tougher times ahead.

Coincidentally, many retail stocks, indexes and exchange-traded funds had stalled near major resistance levels, just ahead of the negative data. This alignment follows a long-held observation that price development leads fundamentals and major news events. It also tells us to watch for a major sector downswing in the next four to six weeks.

Retail HOLDRs Trust (RTH) -- Monthly Source: eSignal

The monthly chart of the Retail HOLDRs Trust(RTH) ETF shows at least seven reversals (red circles) in the past eight years near the $100-level. Also note how the March, 2009, upswing retraced the entire 2007-2009 bear-market decline. In fact, the fund turned south just one point from the June, 2007, high when it topped out in late April.

Microsoft Office Predictions Are Premature (Forbes)

It's natural for a market to roll over and enter an intermediate correction after its retraces 100% of a prior selloff. This proportional dynamic suggests the fund could drop as low as the mid-$80, prior to recovering and attempting to rally through resistance. Strong sales fundamentals will need to support that test, if it's going to succeed.