Over the past several months, as participants in the financial markets have been so focused on allocating capital within safe-haven asset classes such as precious metals, financials and utilities, active traders have had an increasingly difficult time in discovering under-followed trading ideas. In what will come as a surprise to many, chart patterns on key assets within the retail sector are suggesting that the uptrend is one to reckon with and that it is showing little signs of reversing. (For a quick refresher, check out: The Industry Handbook: The Retailing Industry.)

SPDR S&P Retail ETF (XRT)

Investors who seek to track the performance of the retail sector often turn to exchange-traded products such as the SPDR S&P Retail ETF. As the name suggests, the fund comprises companies from across the sector including the following sub-industries: apparel retail, automotive retail, computer electronics, department stores, drug retail, food retail, specialty stores and more. Fundamentally, the ETF has total net assets of $400.2 million, is made up of 85 holdings and carries a gross expense ratio of 0.35%.

Taking a look at the chart, you can see that the sector ran up in late 2017 and early 2018 thanks in part to robust holiday spending. The price has since drifted toward the combined support of its 200-day moving average and an influential trendline. The recent bounce higher is a technical sign that the $42 level is likely to act as a floor during future pullbacks and will likely be used as a guide for determining the placement of stop-loss orders. Active traders will also likely look at the bullish crossover between the moving average convergence divergence (MACD) and its signal line (shown by the blue circle) as a confirmation that the price is likely to move higher over the coming months, and they will likely maintain a bullish outlook on the sector until technical indicators start suggesting otherwise. (For more, see: The Four R's of Investing in Retail.)

Technical chart showing the performance of the SPDR S&P Retail ETF (XRT)

Guess', Inc. (GES)

With a weight of 1.92%, Guess is the largest holding of the XRT ETF. Taking a look at the chart, you can see that the price recently noticed a 52-week high, but the breakout beyond the major resistance (shown by the blue circle) suggests that there is ample room remaining to the upside. From a risk management perspective, active traders will likely look to place their stop-loss orders below the dotted trendline near $20 in case of a sudden pullback. Otherwise, bulls will likely look to continue profiting from the bullish momentum and let their positions ride it out until the trend shows signs of reversing, which could take longer than most bears expect. (For further reading, check out: Analyzing Retail Stocks.)

Technical chart showing the performance of Guess', Inc. (GES)

Abercrombie & Fitch Co. (ANF)

Another popular retail stock that has a relatively high weighting in the XRT fund is Abercrombie & Fitch. As stated in a recent article, the 45.8% gain year to date is likely due in part to institutional players accumulating the stock. Taking a look at the chart, you can see that the stock has been trading in one of the strongest uptrends found anywhere, and the defined range over the past couple of months has created clear buy and sell signals for those who follow technical analysis. As suggested in the analysis above, the recent breakout beyond resistance is a sign that the bulls are in control of the momentum, and this is also a signal that active traders are always on the lookout for as it consistently brings a surge in prices. Traders will likely maintain a bullish outlook until the price closes below either trendline or the 50-day moving average ($22.31), depending on risk tolerance

Technical chart showing the performance of

[Learn how to develop a trading plan based on support and resistance levels in Chapter 3 of the Technical Analysis course on the Investopedia Academy]

The Bottom Line

The retail sector hasn't exactly been one of the pockets of the market that most investors or traders would expect to be outperforming more popular sectors such as technology, precious metals or financials. However, as shown in the charts above, given the recent breakouts beyond key resistance levels and the clear guides they are providing for determining the placement of stop-loss orders, retail could be the under-the-radar segment that traders have been looking for. (For related reading, see: 3 Charts That Suggest Financials Are Headed Higher)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.

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