This column was originally published on RealMoney on July 10 at 12:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Retailers posted mixed results in June. The hit-or-miss data released Thursday morning set off sharp rallies and nasty downturns throughout the sector. Let's review the most prominent action to see what clues it offers about which issues are likely to provide leadership in the upcoming holiday season.
The recent performance of the
Retail HOLDRs Trust
suggests that the outlook for the sector is uncertain.
The exchange-traded fund sold off for five days in a row last week, dropping to the bottom of its three-week trading range. The ETF has been churning below resistance at its 50-day and 200-day moving averages for the last two months.
Last week's decline pivoted off the resistance of the 50-day moving average at $95. This suggests that the Retail HOLDRs Trust will test its June lows soon and probably break down. The next pivot will likely come at longer-term support near $90.
Hopefully this price level will end the decline and start a fourth-quarter rally, but the jury is still out. Perhaps the group's leaders and laggards can fill in the missing pieces. (See chart below.)
A month ago, I examined
breakaway gap off its May decline. The stock continued its strong run after that piece, returning to its 2006 high two weeks ago and nosing above resistance Friday. This outperformance sets the stage for a rally that could reach its 1998 high of $78.75 by the start of the fourth quarter.
American Eagle Outfitters
( AEOS), a pick for my
Daily Swing Trade
newsletter, ran strongly against the tide in Friday's selloff. It broke out decisively from a yearlong cup-and-handle pattern, with key resistance over $35. The first leg of this strong rally should carry up to $40. It looks like teenagers are still hitting the cash registers hard, despite
-speak, missile anxiety and high gas prices.
has far and away been the top-performing retail stock of 2006. It broke out to an all-time high in late 2005 and has been moving higher in a steady uptrend ever since. It embarked on its latest rally leg in June, with a burst over resistance at $40. It could return to this support level in the next few weeks and present a low-risk entry.
No mercy was shown to retailers that missed their June sales numbers, even by a few bucks.
This brutal dynamic suggests that shareholders will have no patience with mediocre performance in the coming months.
reported that June sales rose 6% compared to the consensus expectation of 7%, and it got crushed. The stock fell almost 2 points in a vicious decline that dropped into its May lows. While it closed near the high of its daily range Friday, conditions are in place for a breakdown that eventually fills the February gap at $32.
had a very bad week after preannouncing June comparative sales on July 3. The stock fell decisively in all five sessions, moving toward a key test of its May lows below $45. While the longer-term chart shows sideways movement over the last nine months, this lopsided action suggests that it could drop to its four-year low of $42.
was firing on all cylinders during a rally that stretched from 1997 into this year. That changed in March, when the stock spun into its worst decline in six years. The downtrend accelerated last week as it dropped to 15-month lows. Unfortunately, the pattern shows no encouraging signs -- it could continue to fall through the rest of the year.
Will individual stocks be able to overcome the retail downdraft and go their own way during the 2006 holiday season? If last week's price action continues, the group is headed into a stockpicker's market in which leaders will outperform while laggards get crushed. My advice is to choose stocks wisely and don't try to bottom-pick.
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At the time of publication, Farley held none of the issues mentioned, although holdings can change at any time.
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;
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