Department stores will head higher in the second half of the year if the U.S. economy stabilizes, as many market analysts predict. More importantly, the group should hold up well even if the slowdown continues and consumers hold on tightly to their wallets. In either case, this retail sub-sector deserves a closer look as we head into the warmest months of the year.

In addition, we're now four months from the start of the 2011 holiday season, which kicks into gear right after ghosts and goblins go door to door on Halloween. Even though July has just begun, the market's discounting mechanism looks three to six months into the future to establish current pricing, and retail stocks will now get greater attention, thanks to that seasonal influence.

This examination is likely to generate a relatively narrow stock-picker's market, in which a few well-positioned corners of the retail space perform extremely well, while the majority of storefronts lag behind, thanks to a penny-pinching consumer who will ration holiday sales dollars, thanks to stubbornly high pump prices and an uncertain employment outlook.

Department stores should benefit greatly in this culling process. As it turns out, they aren't as vulnerable to the forces of consumer sentiment as their shopping mall peers, because the top players own extensive real estate holdings that can be evaluated separately from cash-register sales. In many cases, this natural wealth adds value that demands a higher multiple, even when monthly results don't live up to expectations.

DDS Daily Source: eSignal

Dillard's

(DDS) - Get Report

has monetized this foundational wealth better than the competition in the last few years. This explains why the Arkansas-based company has been a top 2011 performer. As I noted in an

April column

, the stock hit 1993 resistance at $52.75 in January (blue line), after the announcement of a real estate investment trust (REIT) subsidiary to manage its vast holdings.

It finally broke out to an all-time high on May 13, in a high-volume rally that topped out in the same session. The stock tested the high about two weeks later and pulled back sharply, filling the big gap and settling in at the 50-day moving average. Price then bounced back to the original breakout level and surged higher in Tuesday's session.

This positive price action marks a failure-of-a-failure buy signal that should eventually confirm the May breakout with a sustained thrust over new resistance at $58. The monthly pattern going back to the early 1990s shows no overhead resistance, so the uptrend could escalate and yield a strong move that lifts it into the $70s before year's end.

JC Penney

(JCP) - Get Report

, in addition to having broad real estate holdings, has now become a major story stock, thanks to its clever hiring of Ron Johnson as the company's new CEO, effective Nov. 1. Johnson is best known as the

Apple

(AAPL) - Get Report

executive who created the iconic and ultra-successful Apple Store.

It's apparent that Penney's board of directors hopes he will bring that legendary sales magic, as well as youthful demographics, to the aging franchise. Although reality will overtake speculation and euphoria at some point, traders and investors have plenty to work with right now, because his labors won't show up in the company's bottom line until the second half of 2012.

JCP Daily Source: eSignal

After hitting a seven-year low at the end of the bear market, the stock rallied to a 52-week high at $37.21 in November 2009 (blue line). It stalled at that level, took a deep dip into the summer of 2010 and returned to resistance in February (red circle). It tested that barrier for three months, making little progress, and sold off in a steep decline that ended in the upper $20s, just above the 2011 low at $28.71 (red line).

Johnson's hiring hit the newswires just two days later, triggering a vertical blast that lifted the stock almost 6 points in four hours. It then eased into a sideways pattern that's still in place as we head toward the second week of July. This price action has now carved the outline of a triangle pattern (green lines), with support at $34 and resistance at $36.20.

A triangle breakout should yield an uptick that tests the resistance zone between $37 and $40. It's tough to get excited about that rally, because the stock has already spent three months in 2011 trying to overcome that significant wall of selling pressure. As a result, a lower-risk trade will come if the triangle breaks down and drops price into longer-term support in the low $30s.

SHLD Weekly Source: eSignal

Finally let's take a look at

Sears Holdings

(SHLD)

, the undisputed basket case of the department-store sub-sector. This stock has struggled for years, thanks to declining year-over-year sales that have been offset by a strong real estate portfolio. Bears have won all the battles in recent months, with price now sitting 3 points below the level at which it opened on the first trading day of 2011.

Price action since the bear market ended shows a two-year high at $125 in May 2010, followed by a lower high at $95 in February of this year (red lines). Steady distribution in the last year has decimated the once-healthy shareholder base, indicating even lower prices that eventually reach the 2010 low near $60 (blue line).

The bottom line: Even bottom-fishers should avoid this industry laggard in coming months, because the bearish 2011 pattern suggests that support level will break and yield a steady decline into the $40s.

At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

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

Barron's

,

SmartMoney

,

Tech Week

,

Active Trader

,

MoneyCentral

,

Technical Investor

,

Bridge Trader

and

Online Investor

. He has written two books:

The Master Swing Trader

and

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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