Retail stocks have had a mixed performance so far this year. Stellar returns in e-commerce growth stocks like Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY) have offset sub-par returns in struggling mall anchor names such as Macy's, Inc. (M) and Nordstrom, Inc. (JWN). The stark divide between winners and losers in the space goes some way to explain why the group as a whole has underperformed the S&P 500 by roughly 15% year to date (YTD).

Although rising online sales and shifting consumer purchasing habits, along with trade dispute worries, continue to present challenges for many retailers, underlying fundamentals remain strong. Resilient economic growth, robust job creation, and wage growth underpin consumer spending. Retail sales figures highlight these favorable conditions – while they dipped slightly in September, they posted gains in the prior six months.

"While uncertainty around trade policy and other issues has dampened consumer sentiment recently, consumers still have a lot going for them as evidenced by longer-term trends and factors like the tight labor market," Jack Kleinhenz, chief economist at the The National Retail Federation (NRF), recently told The Wall Street Journal via email. Moreover, the NRF projects this year's holiday retail sales during November and December to increase between 3.8% and 4.2% compared to 2018 and 3.7% when measured against the previous five years.

From a technical standpoint, the three retail exchange-traded funds (ETFs) outlined below look set for a breakout as we move toward the holiday spending season. Let's take a closer look at the specifics of each fund and also turn to the charts to check out several trading possibilities.

SPDR S&P Retail ETF (XRT)

With assets under management (AUM) of $265.33 million, the SPDR S&P Retail ETF (XRT) seeks to provide similar investment results to the S&P Retail Select Industry index – a benchmark comprising a broad range of U.S. retail stocks across all market-cap sizes. The fund's top three sub-industry allocations include apparel at 21.55%, internet and direct marketing at 17.91%, and automotive at 17.24%. An ultra-low 0.03% average spread combined with a daily turnover of roughly 6 million shares make the ETF suitable for both scalpers and swing traders. XRT charges a 0.35% annual management fee, issues a dividend yield of 1.59%, and has returned 5% YTD as of Oct. 18, 2019.

An inverse head and shoulders pattern has formed on XRT's chart over the past five months, indicating further upside into year end. Price closed convincingly above the bottoming structure's neckline and 200-day simple moving average (SMA) Thursday, which may result in buyers pushing the ETF toward the next major zone of resistance between $46 and $48. Furthermore, a relative strength index (RSI) reading below overbought levels gives the price ample room to test this level before a corrective move. Traders should think about placing stop-loss orders somewhere below the 200-day SMA to protect capital.

Chart depicting the share price of the SPDR S&P Retail ETF (XRT)
StockCharts.com

Direxion Daily Retail Bull 3X Shares (RETL)

The Direxion Daily Retail Bull 3X Shares (RETL) aims to return three times the daily performance of the S&P Retail Select Industry index, effectively making it a geared version of XRT. RETL's leverage makes it an ideal instrument for traders who want an aggressive bet on a wide selection of retail stocks that operate in various industries. The fund's underlying index consists of about 85 holdings that help diversify risk across the segment. Those who trade the ETF should use limit orders, rather than market orders, to combat a wider 0.45% spread and average trading volume of around 36,000 shares. The fund's 0.99% expense ratio isn't cheap, but this is less important given the fund's short-term tactical mission. As of Oct. 18, 2019, RETL has net assets of $13.72 million, yields 1.25%, and sports a flat return on the year. Theoretically, the ETF should've returned 15% YTD (three times the performance of XRT); however, because it rebalances daily, returns have deviated from the advertised leverage due to the effect of compounding.

Because RETL tracks the same index as XRT, both charts closely align. The right shoulder of an inverse head and shoulders pattern found support on the 50-day SMA earlier this month, with price now testing the formation's neckline and 200-day SMA. A cross of the moving average convergence divergence (MACD) line above its signal line on Oct. 14 confirms recent bullish price action. Traders who open a long position at current levels should target a move to crucial overhead resistance at $33.50 and set a stop order beneath the low of one of the past three trading sessions, based on personal risk tolerance.

Chart depicting the share price of the Direxion Daily Retail Bull 3X Shares (RETL)
StockCharts.com

ProShares Online Retail ETF (ONLN)

Launched in July 2018, the ProShares Online Retail ETF (ONLN) has an objective to provide returns that generally correspond to the ProShares Online Retail Index. The $21.92 million fund does an excellent job of offering exposure to retail companies that primarily sell online – namely through mobile platforms or via app purchases. Because the ETF weights stocks on a modified market cap basis, large names in the industry carry sizeable allocations. For instance, e-tailing giant Amazon and China's equivalent Alibaba Group Holding Limited (BABA) command respective weightings of 23.87% and 12.38%. The fund's trading volume can dry up at times, with about 10,000 shares exchanging hands most days, although an average four-cent spread keeps transaction costs competitive. ONLN is the best performing fund of the three discussed, gaining just over 14% YTD as of Oct. 18, 2019.

The fund's share price has traded within a falling wedge pattern since July to set clear support and resistance areas. Traders should look for a buying opportunity if price closes comfortably above the pattern's upper trendline on above-average volume – a move that could reignite the early 2019 rally and see a retest of the 52-week high at $40.16. If a breakout does occur, cut losses quickly if price stalls and reverses back below the wedge's top trendline.

Chart depicting the share price of the ProShares Online Retail ETF (ONLN)
StockCharts.com