The holiday season is finally over, with retailers posting their worst results in several decades. It's a perfect time to

take a fresh look

at the sector and see if bad news is finally baked into these economically sensitive issues. While the exercise might not yield instant buy or sell signals, it should point out major inflection points for the first half of 2009.

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As we work our way through January, it's important to note how the bad-news-is-good-news drumbeat undermined common sense right out of the gate in 2009. The contrary mechanism that triggered higher prices last month was strictly calendar-driven, with Wall Street folks putting a layer of lipstick on the pig to tidy up their annual results.

Obviously, this glass-half-full sentiment has now vanished, and in its place, bad news is being treated as bad news. Sadly, there's plenty of that commodity to go around in this brutal contraction. Add in a multi-trillion-dollar deficit that could repeat for many years, and we have the makings of a more realistic 2009 ticker tape.

All of this warns us to act more logically when news flow doesn't support higher equity prices. We all know there's a light at the end of this tunnel, but it makes no sense to over-anticipate that turn, because it isn't needed to make money. Simply put, there will be plenty of time to take advantage of the long side after a "real" bull market gets under way.

Back to the retailers, which are trading right at ground zero in the current downtown. The

Retail HOLDRs Trust

(RTH) - Get Report

churned in a 20-point range for more than five years before breaking down on heavy volume in October. That decline carried into $60, which corresponded with the low posted at the end of the last bear market. Notably, that downtrend bottomed out in 2003, or four months after the major indices.

The October breakdown has generated heavy resistance near $85, with the ETF failing to approach this barrier since bouncing strongly in December. Note the six-week range between $65 and $80. This sideways pattern could provide a base for a rally into that resistance level, or it could set the stage for a renewed decline that tests last year's low.

Accumulation shows improvement in the last two months, pointing to a few aggressive investors willing to establish positions in the group. But seasonality is skewing this reading, because the sector tends to post its highest volume in the fourth quarter on holiday speculation. So, we're still months away from a legitimate buy signal.

The sector's 2003 turn raises more doubts about the current recovery effort. At that time, buyers went on strike until the rest of the market stabilized and started to move higher. In this bear market, at least so far, we have lock-step behavior between the sector and the major indices. That suggests a technically driven sector that can easily break its November low.

Let's shift our focus to the department stores, which have been perennial underperformers, even in the calm period before this bear market began in 2007. Of course, mall anchors thrive on high-margin sales, which have been sacrificed to the bargain bins due to the economic downturn.

These players have acted surprising well in the last two months. It could be that the group is massively oversold after several years of selling pressure, or more likely, we could be looking at a "false dawn" event that will eventually give way to a renewed decline. In either case, it's our job to trade what we see, and this group could be offering long-side opportunity right here.

JC Penney

(JCP) - Get Report

topped out at an all-time high in February 2007 and entered a steep decline. It had fallen over 80% when it finally bounced in November and jumped back into the low $20s. The stock has been moving sideways since that time, grinding out the final phase of an inverse head-and-shoulders breakout pattern.

A rally over last week's high at $22.90 may trigger an uptrend that reaches into the lower $30s, where the 200-day moving average is likely to stall progress. However, it's important not to gun the jump here. The early-2008 recovery attempt looked surprisingly similar to the current pattern, but that one eventually failed and gave way to a selloff.

Other department stores grinding through constructive price patterns in this January market include

Sears Holdings

(SHLD)

and

Macy's

(M) - Get Report

.

Moving on, the broad retail sector always includes a few mavericks that post solid sales results despite adverse economic conditions. For whatever reason, these trendy locales attract a steady flow of customers willing to open their wallets in bad times, and it's been no different this time around.

It's been hard to hold down

Aeropostale

(ARO)

in recent years. The casual-apparel retailer reported a healthy 12% sales increase last month, even though most analysts expected negative numbers. The surprise results lifted the stock to a two-month high in the next leg of a recovery that began in the low teens in October.

However, I'm not crazy about vertical rallies in bear-market environments. Sellers are likely to pound down the stock when upside momentum fades, with the next pullback giving up a good portion of the recent gains. However, support at the rising-lows trend line should hold off any decline, setting up a low-risk entry near $16.50.

Other specialty shops moving to the upside in this January market include

Hot Topic

(HOTT)

and

Stage Stores

(SSI) - Get Report

.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Hot Topic and Stage Stores to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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

Farley is also the author of

The Daily Swing Trade

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

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,

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,

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,

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,

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,

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,

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and

Online Investor

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

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