A strong economic backdrop, the lowest U.S. unemployment in a decade and healthy wage gains should ensure a bullish 2017 holiday season, with brick-and-mortar and online retailers meeting or exceeding current expectations. Even so, more cautious market players will be looking past December's cash register receipts and into the sector's intermediate outlook before scooping up shares in the hottest holiday plays.

Widely held sector issues including net juggernaut Amazon.com, Inc. (AMZN) are technically overbought right now, offering little value at these lofty price levels. Mid- and small-cap retailers with strong price patterns look like more reliable short-term and intermediate bets, attracting speculative capital that could signal healthy gains well into the first quarter, when highly positive January effect seasonality could trigger a fresh round of rotational buying pressure. (See also: January Effect Revives Battered Stocks.)

 

The Children's Place, Inc. (PLCE) shares topped out in the lower $70s in 2006 and sold off to a five-year low in the mid-teens in 2008. The stock finally completed a round trip into the prior decade's high in 2015 and pulled back, carving the handle of a cup and handle pattern that broke to the upside in the second quarter of 2016. That buying impulse stalled above $120 in March 2017, giving way to a broad correction that found support in the upper $90s.

The stock surged off range support in mid-October and completed the transit into range resistance a month later, giving way to a brief consolidation followed by a breakout to an all-time high above $130. It is now pulling back and could fill the Nov. 15 gap between $116 and $117, offering a low-risk buying opportunity ahead of continued upside that could reach $150 in the first half of 2018. (For more, see: Is Children's Place Too Expensive After Great Results?)

 

The Buckle, Inc. (BKE) stock posted an all-time high at $57.22 in 2013 and pulled back in a trading range that carved a bearish double top pattern with support at $41. It broke down in the second half of 2015, entering a channeled decline that continued into the August 2017 test at the 2008 bear market low in the lower teens. Aggressive buying interest emerged at that deep support level, generating a vertical recovery wave that has now reached a 10-month high.

The high-volume uptick pierced 200-day exponential moving average (EMA) resistance just above $18 in early November, while subsequent buying pressure mounted the May 2017 high at $20.40. This bullish price swing has ended the long string of lower highs and lower lows in place since 2013, signaling the start of an uptrend that could reach long-term resistance in the upper $20s. A pullback that undercuts round number support at $20 might offer a low-risk entry ahead of healthy price action into January. (See also: Buckle's Dismal Comps Run Persists, Stock Down 25% YTD.)

 

Five Below, Inc. (FIVE) came public at $26.05 in July 2012 and entered an uptrend that posted a major top at $55.28 in November 2013. The subsequent downtrend continued for more than two years, finding support within 90 cents of the IPO print in the fourth quarter of 2015. It surged higher in 2016, stalling within three points of long-term resistance, while a pullback into 2017 carved a five-month basing pattern in the upper $30s.

The uptrend finally completed the three-year round trip into resistance in June, while a rounded consolidation into September printed the final stage of a multi-year cup and handle pattern. The stock broke out in October, entering a rising channel that is now guiding price action toward $60. A pullback to $57 should find willing buyers ahead of continued upside that is generating a long-term measured move target in the low $80s. (For more, see: Five Below Expanding Into California.)

The Bottom Line

Mid- and small-cap retailers are gaining ground in a long overdue recovery rally, perfectly timed to a 2017 holiday season that should post healthy sales receipts for both brick-and-mortar and online operations. These three sector plays should benefit from this bullish wave, posting new highs well into 2018. (For additional reading, check out: Why Macy's, Nordstrom, Target May Rise on Holiday Sales.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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