This column was originally published on RealMoney on Jan. 16 at 12:00 p.m. ET. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here .

The retail sector is perking up nicely this January, despite weaker-than-expected fourth-quarter sales results. While the group is still lagging behind the broad averages by a small margin, the deficit could vanish in the coming weeks. With that in mind, let's take a closer look at these stocks and identify the best sector opportunities.

First, here's my apology for being too bearish on the group in recent months and calling for a breakdown by the end of 2006. Obviously that didn't happen. Now the danger has passed and speculators are placing fresh bets that plunging energy prices will encourage shoppers to reopen their wallets in the first quarter.

It's obvious that pump prices will correlate directly to retail performance in 2007. Simply stated, consumer spending should continue to perk up as long as crude oil prices stay weak or get weaker. Of course, the trick is to identify which corners of the shopping mall will offer the best returns while the broad sector moves higher in coming months.

How will the retail sector's top dog affect this developing uptrend? Sadly, the Wal-Mart ( WMT) weekly chart reveals a struggling stock that hasn't gone anywhere in the last two years. This is both a blessing and a curse. The flatline shouldn't hurt sector leaders in the first quarter, but it won't give a lift to underperformers either.



For the first time in decades, the company is suffering from negative growth. In other words, the category killer paradigm supporting its expansion might be coming to an end. Or perhaps the megastore concept is just hitting a bump in the road to even bigger growth. In any case, the flatline says no one knows the truth right now so stay away.

The Retail HOLDRs Trust ( RTH) shows bullish action in the last four months at round-number resistance near 100. This high, tight pattern is lifting relative strength readings and setting the stage for a major breakout. That would be a notable event because the price level also marks multiyear resistance.

The sector could start an extended uptrend after the breakout. The size of the broad pattern places an initial target near 113 and could eventually tap into much higher prices. The good news is there's no rush to pile into the sector at this time because the rally is still in its embryonic phase.

Top-performing retail stocks generally fall into one of two major categories. The first group is populated by hot-ticket stores that show rapid growth focused on a particular demographic or buying trend. These volatile issues attract a hot-money crowd and often trade more like technology or biotech stocks than retail operations.

The second group is more sedate but can outperform their attractive cousins for long periods. These are the well-established companies that succeed with longer-term trends, smart pricing and household names. They also give their shareholders fewer sleepless nights and more stable returns over time.

Target ( TGT) is my favorite name in this second group and a current pick in The Daily Swing Trade . The stock has been grinding through a bullish triangle pattern after running from 45 to 60 in the second half of 2006. This consolidation should eventually yield a strong breakout that supports a rally to 75, which is equal in size to last year's uptrend.

It looks like the current pattern needs back and fill between 56 and 60 before price can move substantially higher. This is also options-expiration week and squaring activity could easily pull the stock back under last week's spike through 60. So the best entry for conservative players might come on another pullback to the 50-day moving average.

J.C. Penney ( JCP) also had a strong run last year. The stock stalled out in November, right at eight-year resistance near 79. It's been pulling back since that time but may have bottomed last week when it tested the 50-day moving average successfully. If so, it could now be setting up for a multiyear breakout.

This is a good spot for aggressive players to get on board, as long as they place stop losses under the recent low near 75. Everyone else can just sit back and wait for the pattern to set up more favorably. A move above bull flag resistance at 80.50 should provide a good buying signal, or wait for the rally above the November high.

TJX Companies ( TJX) broke out to an all-time high in September and rallied to 29.84 before stalling. It then dropped into a healthy congestion pattern with resistance at the high. The stock pressed up to this level at the end of last week and could break out soon, sending price into the mid-thirties.

It's tricky to play round numbers during expiration, so caution is advised in the upcoming week. But this move should eventually hold and lift the stock to new highs. The size of last year's breakout predicts the uptrend will persist for many months before grinding to a halt. So this stock might be an excellent choice for a longer-term investment portfolio. I'll follow up on Thursday with my top picks in the trendy, hot-money retail stocks.
At the time of publication, Farley had no positions in any of the stocks 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; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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