At this point in time, the retail segment of the U.S. economy, as measured by the SPDR S&P Retail ETF (XRT), is trading at a potential inflection point. Taking a look at the chart, you’ll notice that the price of the ETF is currently testing the long-term support of an ascending trendline (blue dotted line) and its 200-day moving average (red line). Bullish traders are watching closely for a bounce off of these key levels similar to what has happened many times over the past few years. It is extremely important to note here that at a sustained close below these levels will trigger a long-term downtrend in the sector and could be area of the market that leads others lower. Astute traders will want to analyze the key holdings of the ETF for clues as to whether the sector is setting up for a move lower. (For more information, see: Market Reversals And How To Spot Them.)

Analyzing Retail Stocks

As previously mentioned, one of the best ways to get a better idea of whether the retail sector is in for a major correction is to analyze the key holdings of a major ETF such as XRT. For those who don’t follow this ETF, the top five holdings as of July 25, 2014 are shown in the table below:

Company

Weighting (%)

GameStop Corp. (GME)

1.23%

Lithia Motors Inc. (LAD)

1.22%

Petsmart Inc. (PETM)

1.20%

SUPERVALU Inc. (SVU)

1.16%

Land’s End Inc. (LE)

1.15%

Taking a look at the chart of GameStop, which is the largest holding of XRT, you’ll see that the bulls have recently managed to send the price above the resistance of the 200-day moving average. Notice how this area was too much for the bulls when they tried to send the price higher in April. Traders will keep a bullish outlook on this stock until the price closes back below the 200-day moving average ($42.19). (For more, check out: Support And Resistance Basics.)

A Bullish Recovery

Taking a look at the chart of PetSmart Inc. you’ll notice that it looks similar to GME shown above. The price of PETM also failed to regain the 200-day moving average early in the year, but recent talk of a potential leveraged buyback has been enough for the bulls to send the price back above the resistance. As was the case shown above, traders will likely hold a bullish outlook until the price closes back below the 200-day moving average ($67.16).

Strong Moves Higher

Taking a look at the charts of LAD and LE Shown below, you’ll see that they are both trading near 52-week highs. The lack of overhead resistance on both charts suggests that the prices of these stocks could be heading over of the coming months – a bullish signal of the overarching sector.

The Bottom Line

The chart of the SPDR S&P Retail ETF, which is a key barometer of the U.S. retail sector, is currently trading near an influential level of support and resistance. A close below its 200-day moving average and ascending trendline would suggest that the sector is likely to experience a prolonged downtrend. By analyzing the key holdings of the fund, we noted that the underlying prices are all trading within bullish chart setups. Traders will want to continually monitor the nearby 200-day moving averages of GME and PETM because they are at risk of being pushed lower by these levels as was case for both earlier in the year. For now, the bullish positions of GME and PETM combined with even stronger setups on the charts of LE and LAD suggest that the retail sector is likely to resume the uptrend – at least for over the short term. (For more, check out Analyzing Retail Stocks)

At the time of writing the author did not own shares of the companies or ETF mentioned in this article.

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