This column was originally published on RealMoney on June 5 at 12:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
I'm not finding many bullish patterns after last week's run-up to resistance. This tells me not to expect a quick rally to the 2006 highs. Of course, that isn't surprising given the level of technical damage from the May selloff. But this recovery still has considerable upside, so let's give the market more time to build a sustainable bottom.
Many top retailers reported impressive sales data for May. This suggests that consumers aren't tapped out and could keep the economy afloat for months to come.
bashers had been pointing to consumer retrenchment as the main reason why rates should stop rising. Apparently, they'll need to look elsewhere to support their cause.
In that vein, the jittery interest rate environment already may be in self-healing mode. Commodity prices keep falling, and home sales are continuing their post-bubble decline. The data-dependent Federal Open Market Committee should take notice of these developments when it meets later this month -- it might even put Chicken Little back into his cage.
We're headed into a volatile period that climaxes with quadruple-witching options expiration June 16. Look for its considerable influence to begin Thursday when index futures roll over into the September contract. Watch for a negative bias just before the rollover date, followed by a recovery into the weekend.
Because of quadruple witching, we won't get clear signals on market direction until we're closer to the end of the quarter, but you can bet the farm that talking heads will take every options-driven swing and form-fit it to their personal biases. For this reason, it's vital that traders ignore everything they see and hear until we get through this quarterly nightmare.
Not all expiration periods follow their natural bias to gravitate toward magnetic strike numbers. You may recall that May's event triggered a steady downtrend, which rarely happens during expiration week. Despite last month, trading against popular sentiment is still the best way to play expiration. That means looking for short squeezes after all attempts to take the market lower in the next two weeks.
It's no secret I'm expecting the market to move higher this summer. I made that argument last week, and everything that's happened so far supports my conclusions. The bottom line is the macro environment is changing slowly for the better, but it will take time for positive forces to kick into gear. In the meantime, we need to trade light and leave our opinions at the door.
Where can we look for leadership after May's nasty decline? Perhaps the answer lies in last week's surprisingly good retail sales numbers. After all, the consumer will have the final word about the state of the economy in the months ahead. And right now it looks like they're opening up their wallets once again, despite recession fears.
The markets are a future discounting mechanism. That's why holiday speculation usually begins three to six months before retailers ring up their first fourth-quarter sales. This might be the perfect time to look at this recovering sector and make a list of top prospects for the third quarter and 2006 holiday season.
Here are three retail stocks that surprised the market with strong May sales last week. I'll follow up with five more charts in Tuesday's column. Note that some of these issues have already rallied into tests of significant highs, while others are building basing patterns. Look for this healing process to continue through the long hot summer.
rallied to a seven-year high at $68 in early May and dropped into an orderly correction. The outlook appears bleak when the stock broke its 50-day moving average early last week. But price then rallied out of the low in a breakaway gap after the retailer reported an 11.1% sales increase in May. The vertical spike sets the stage for a test of this year's high.
It's unlikely for two reasons: Breakaway gaps tend to hold up well and deny easy entries to pullback traders, and strong support at the 50-day moving average should kick into gear on any decline and keep the stock above $62. It looks like that price will be the best entry.
Longtime readers know that
( DBRN) is one of my favorite retail plays. The stock rallied to an all-time high at $28 in early May and sold off below its 50-day moving average. It rallied up to that level in a wide-range bar prior to the release of sales data and then gapped up on heavy volume. This rally sets up a test of the 2006 high.
This is a tough chart to read because the two-day vertical rally triggered a short-term overbought condition. It looks like the stock wants to fill the gap but is finding support at the remounted May 12 breakdown. This conflict could trigger several weeks of sideways action before a successful run at the highs.
Christopher & Banks
wasted no time jumping back to its two-year high after strong May sales data. But this stock was already in better shape than 99% of its peers at the time of the news release. It never broke support during the May pullback and bottomed out several weeks ahead of other sector issues.
But there's a major problem on the reward side of this bullish-looking chart. The stock hit its all-time high in 2003, with a two-month topping pattern at $31. That resistance level will now come into play on the current breakout. Given the vertical lift off Wednesday's close at $27, there's considerable risk in taking a position on this rally to new highs.
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Alan Farley is a professional trader and author of
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. 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;
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