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.

The monthly chart of the

Retail HOLDRs Trust

(RTH) - Get Report

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.

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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.

That might be a problem because the limp April sales data aligns perfectly with the first full month after the March, 2009, low. Consumer sentiment began its slow return from the dead in April, 2009 (the comparison month), picking up steam later in the year. In other words, retail sales numbers will face much tougher comparisons going forward.

Despite growing sector headwinds, we're heading toward June, which is the traditional starting point for speculators to open their first plays on the 2010 holiday season. This positive seasonality suggests that sector "story" stocks, as well as a handful of group leaders, may decouple from the weakening competition and continue to head higher.

Although it's still early, let's identify three potential winners so we can get them onto our watch lists and see if they act better than the sector as a whole in the coming weeks. In a nutshell, resilience in the face of continued selling pressure would offer a major clue on whether these stocks can outperform in the second half of the year.

Department-store sales fell off a cliff in April, with sector leader

Dillard's

(DDS) - Get Report

reporting a 5% decrease and cutting its quarterly revenue estimates. This is a troubling development because these mall anchors affect results across the variety of satellite shops. Notably,

Macy's

(M) - Get Report

was one of the few anchors that beat monthly estimates.

This retail icon bottomed out near $5 in late 2008, and entered a steady uptrend that hit a multiyear high recently at $25.25 in late April. It then pulled back with the broader market, selling off into moving-average and breakout support (red circle) last week. Price action shows a strong recovery off that low, with the stock setting up a possible test at the rally high. A lot will depend on the reaction to this morning's

earnings report

.

Dollar and variety stores are back in vogue, in a replay of the 2008 recession trade. In many ways, this is a counter-retail play because these issues tend to move lower when the rest of the sector moves higher. That also means they could outperform if the April data foreshadow an industry slowdown.

Dollar Tree

(DLTR) - Get Report

is the strongest subsector component, after breaking out above multiyear resistance in September and trading to a high. Momentum increased in February in a series of rally waves that lifted price into the low-$60s. The stock is currently rangebound, as this weak market keeps a lid on its powerful uptrend.

Although the ladies in our lives might love to shop, a high-end men's store has been sitting at the top of my apparel performance list for many months.

Jos. A. Bank Clothiers

(JOSB)

is a high-end retailer with nearly 500 locations. The stock is an absolute powerhouse, breaking out above four-year resistance in March and jumping to a high.

It has pulled back with the broad market in the past two weeks, but the decline has held above the 50-day moving average. The stock has now popped into the low-$60s and is well-positioned to retest the April high. While this market leader would benefit from a stronger sector, it's also fully capable of making its own way to higher ground.

At the time of publication, Farley had no positions in the stocks mentioned.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in

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. He has written two books:

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The Master Swing Trader Toolkit: The Market Survival Guide

, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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