Retailers have reported better-than-expected sales in both of the monthly reports that have been issued since the horrendous 2008 holiday season. But do these hopeful numbers really point to a long-term sector recovery, or are they flashing yet another false dawn ahead of a renewed downturn that could land the weakest members of the group in bankruptcy court?

Frankly, I have little optimism when it comes to retail performance in the next 12 to 18 months. In my heart, I believe that wishful thinking is driving the most recent retail uptick, as American consumers deal with the conflict between dwindling personal resources and credit-fueled lifestyles they can no longer afford.

As a society, we're just not used to choosing between the things we need and the things we want. I fully expect this me-now-me-first attitude to dissipate as the full impact of the 2008 crash comes home to roost. And when consumers finally wake up to reality, along with stacks of unpaid bills, they'll be reining in their spending habits even further.

However, I'm willing to keep an open mind and just follow the price action for now, before reaching a final conclusion about the retail sector's longer-term outlook. To this end, let's look at the current evidence and see how the latest market recovery has affected the group's major players and exchange-traded funds.

NYSE Stocks (XRT) -- Daily
eSignal

The SPDR S&P Retail ETF ( XRT) offers a more balanced view of the sector than the Retail HOLDRs Trust ( RTH), which is heavily overweighted in Wal-Mart ( WMT). XRT has been in a steady downtrend since 2007, when it topped out at $45.51. The last selloff wave began in September, when it plunged from a 10-month high near $35.

The fund bounced in November and jumped up to resistance at the 50-day moving average. The early January peak at $22 gave way to a channeled decline that found support near $18. The latest buying impulse lifted price over channel resistance last Friday, with that bullish surge now testing the three highs posted earlier this year

This is an interesting pattern, because the breakout could mark the next phase in a major double bottom. If so, the next buy signal will emerge when the fund breaks above the January high. However, the 200-day moving average is sitting just 2 points above that inflection point, warning perspective buyers to lower their expectations.

Wal-Mart (WMT) -- Daily
eSignal

Market analysts pushed Wal-Mart as a recession play throughout 2008. But anyone who bought the argument or the stock lost money, because the retail giant has been a notable underperformer in the last six months. In particular, it's still trading near the October low and showing few signs that it's getting ready to recover.

So what has gone wrong with this obvious beneficiary of the worldwide economic downturn? Simply stated, the company is doing well, but it's not enjoying windfall profits from the massive troubles plaguing the rest of the industry. As a result, there's no good reason to drive up the stock's price to adjust for higher valuations.

In addition, there's a common theme between Wal-Mart's limp performance and weak action throughout the blue-chip segment of American retailers. In fact, retailers trading at or near multiyear lows reads like a Fortune 500 list of industry leaders, including Home Depot ( HD), Lowe's ( LOW), Target ( TGT), Walgreen ( WAG), J.C. Penney ( JCP) and Costco ( COST).

The failure of these retail giants to match or exceed the negative performance of the S&P 500 index makes it unlikely they can lead the broad sector to higher levels in coming months. So I believe the group's hopes fall squarely on the shoulders of the mid-cap specialty shops that fill our malls and suburban megaplexes.

Not surprisingly, that's where you'll find the real action in the retail sector these days. Look at Best Buy ( BBY), Hot Topic ( HOTT) or Ross Stores ( ROST), and you'll notice healthy buying interest, despite the obvious challenges. This is a positive sign that investors are willing to buy the sector when the right opportunities come along.

Men's Wearhouse (MW) -- Daily
eSignal

Men's Wearhouse ( MW) shows how a little good news can go a long way in the beaten-down retail sector. The clothier bounced with the broad market in November, after selling off to a five-year low in single digits. The recovery stalled at the 50-day moving average two weeks later, with price dropping in a slow-grind pullback that lasted over two months.

The stock sold off to within a point of the bear market low and then gapped up on heavy volume, rocketing over 28% in a single session. This is a legitimate breakout that should mark a cyclical low. Price is now caught halfway in between the 50-day and 200-day moving averages, which isn't a great spot to initiate new positions. However, that will change on a pullback that fills the gap.


Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
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 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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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