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Ride The Retail Wave

|Includes: M, RL, SPDR S&P 500 Trust ETF (SPY), XRT

As you wrap up your Christmas shopping, don't forget to buy some gifts for your portfolio. MoneyShow's Tom Aspray suggests potential stocking stuffers in the retail sector.

The action Monday was quite strong as advancing stocks led the decliners by a two to one margin. The NYSE and S&P 500 Advance/Decline lines have turned higher from support indicating that the correction is over. The leading action of the NYSE A/D line this fall was positive for the intermediate term.

The movement on the fiscal cliff debate suggests some kind of deal will be put together, and if it includes a year-long extension on the debt ceiling, it may help spur new corporate investment. The financial stocks were strong Monday as the Select Sector SPDR Financial (XLF) has been the best performing select sector ETF this year.

The second best performing sector in 2012 has been the Consumer Discretionary sector, which includes the retail stocks. There are positive signs from both a leading retail ETF and several retail stocks that they are ready to finish 2012 on a strong note.

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Chart Analysis: The SPDR S&P Retail ETF (XRT) is up 20% so far in 2012 versus a 15.9% gain in the Spyder Trust (SPY).

  • XRT came close to the 61.8% Fibonacci retracement support from the June lows at $59.52 in November as the low was 59.58.
  • The recent pullback reached the quarterly pivot at $61.75 on Friday and closed strong Monday.
  • The daily downtrend and next resistance is in the $63.56-$63.76 area.
  • A close above this level will complete the correction and signal a move to the 127.2% Fibonacci retracement target at $67.02.
  • The relative performance broke its downtrend, line b, in early November, which confirmed its uptrend,
    line c.
  • The RS line has turned up after testing this support.
  • The daily OBV is now testing support at line e, but needs to move back above its WMA and then resistance (line d) to confirm a new buy signal.

Macy's Inc. (M) has been in a broad, upward sloping trading range since the latter part of August with resistance at line f. Macy's has found support at the 200-day MA, which is now at $38.21.

  • The quarterly pivot is at $37.23, which is just above the September 28 low at $36.94.
  • There is first resistance at $39.72 and then at $41.76-$41.95.
  • A close above the long-term resistance at $42.25 would be a major upside breakout.
  • The daily RS line shows a pattern of higher highs and is now trying to turn higher from support at line g.
  • The daily OBV is in a tight trading range, lines h and i, as it turned higher Monday.
  • Based on current data, the quarterly pivot for Q1 2013 would be at $39.48

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Ralph Lauren Corp. (RL) is another stock like Macy's that I recommended early in the year. The daily chart shows over a three-month trading range with the high at $165.41 (line a) and a low at $148.06
(line b).

  • The lows have undercut the quarterly pivot at $150.11 several times and it was again tested but held over the past few days.
  • There is next resistance in the $157 area and a breakout of the trading range would give an upside projection of $182.76.
  • To calculate this you take the difference ($165.41-$148.06 = $17.35) and adding it to the high of the range,
  • The relative performance broke its uptrend, line d, over the past few days but has again turned higher.
  • The RS line has formed higher highs, line c, but needs to move back above its WMA on a further rally.
  • The on-balance volume (OBV) is stronger as it has moved above its WMA and is close to next resistance at line f.
  • A move in the OBV above the long-term resistance at line e, will be even more positive.

What it Means: A resolution of the debate in Washington DC that does not just push the problem off for a few months, but gives us a year where there is more certainty for business owners, I think, will be very bullish for stocks in 2013. Therefore, I think that those who move even gradually into equities now will benefit in 2013 as public participation in stocks is currently low.

As I have noted in the past, the retail sector does have a strong seasonal tendency to rally from September through the end of the year. The technical action of this ETF and the two retail stocks suggests they have significant upside potential.

Equally important is that our buying zones in the two stocks is very close to good support, which I think is a smart way to buy.

How to Profit: For the SPDR S&P Retail ETF (XRT), go 50% long at $62.74 and 50% long at $62.46, with a stop at $59.28 (risk of approx 5.3%).

For Macy's Inc. (M), go 50% long at $38.64 and 50% long at $38.16, with a stop at $36.67 (risk of approx 4.5%). Cancel if $40.40 is hit first.

For Ralph Lauren Corp. (RL), go 50% long at $152.84 and 50% long at $151.46, with a stop at $147.48 (risk of approx 3%). Cancel if $158 is hit first.

Also I made two recommendations on Twitter before the opening which I will review tomorrow. Today's recommendations were also sent out on Twitter before the opening.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.