Wal-Mart (WMT), the world's largest retail company reported earnings this morning so we thought that this would be a good opportunity to review the retail sector. The retail sector includes a variety of different companies, including the other big traditional "brick and mortar" stores such as Home Depot (HD) and Target (TGT), specialty clothing stores such as The Gap (GSP), and even internet companies such as Amazon.com (AMZN). Last time we reviewed this sector, in April 2005, we were bearish. The sector ended up turning against us, for a while, however and it formed a distinct triangle pattern with its chart.

Compared to the S&P500, retail's performance has been lagging slightly for the last year, but we think that this could change soon. From a technical standpoint, this triangle pattern that you can see in the chart below might finally be at an end, which would signal a coming gain in the index. From the fundamental side, optimism about retailers is growing with recent strong earnings reports.

Retail HOLDRs (RTH)

We normally use the index chart but this week we are using the chart of the Retail HOLDRs ETF (RTH). As we mentioned above, the price of this fund has formed a very distinct narrowing triangle pattern. From the movements that it has made in the last week or so, it appears that this pattern is at its end. The price has moved above the red resistance line and its moving averages. It should continue to head higher from here, especially if the economic news continues to be good. We believe that it will reach 103 at least, which is about a 5% gain over Friday's close. However, we would put a stop at 95 if the price decides to reverse again.

We've already talked about some of the companies that are included in this sector but we wanted to go ahead and discuss which ones have been performing well and which have been dragging down the index. CVS Corp (CVS) and Best Buy (BBY) have done exceptionally well over the last year while Wal-Mart (WMT) and Gap (GPS) have been lagging in the sector. Of course, if you're looking to invest in this sector you can always just buy the exchange traded fund that we talked about above, the Retail HOLDRs (RTH) or there are plenty of mutual funds that invest in retail companies.

Price Headley is the founder and chief analyst of BigTrends.com.