Yesterday the bad news for retail continued to compound. It started with Circuit City filing chapter 11 bankruptcy protection. Starbucks after the market closed laid an egg with earnings not helping the situation. This is not unexpected given the current economic environment. So, today I wanted to take a look at a the sector for any potential investment opportunities. Let’s start with the consumer cyclical chart below. The 225 resistance and 185 support are the key levels to watch. Inside of that is 204 and 220. These points are short term flex points. For me that means there could be an opportunity to trade short term.



The break up or down at this point is still to be determined. While the pressure is to the downside from a fundamental perspective the technical data is leaning towards the upside. Generally I lean towards the technical data in this type of market environment, but I still believe the investor is trying to wish the sector higher. We are just a few weeks away from the biggest shopping weekend of the year and the reports are not favorable. If the data continues to be bad the downside will win out.

As I always say – it doesn’t really matter what I think, it matters what happens. Thus, adding this to my watch list is prudent to let it play out. A trade on the short side could happen with a break below the 204 mark. The upside I would wait for a move above the 225 level. SCC, Proshares UltraShort Consumer Services ETF, could be a diversified way to play the downside. The upside would be UCC, Proshares Ultra Consumer Services. Otherwise I would drill down and find the stocks with the greatest weakness technically. RTH is the most liquid ETF to play retail sector. PowerShares has PMR, but it is thinly traded.

Another angle to view here is the real estate component that leases to these stores. With Circuit City closing more than 100 stores and filing chapter 11 bankruptcy protection there could be some downside in the REITs. RTL from iShares is such an animal, but the volume is extremely low. I am still looking for other ways to play this downside potential.

The discount stores continue to look solid as the money is rotating towards them. The Dollar Tree and Family Dollar Stores are both worth a look as well as Wal-Mart. The discount stores are the likely winners in this game short term.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.