The Retail HOLDRS (AMEX: RTH) ETF is not showing signs of major distress in the sector.

Yet, the bankruptcy of The Sharper Image makes this sector worth watching, as pressure from lagging sales may start to mount.

The bankuptcy of Sharper Image may be company specific. Yet, it could also be a sign of further problems ahead for the retailing sector, as consumers tighten their belts and their pocketbooks.

For now, RTH is in a relatively mild down sloping chart pattern that suggests moderate selling. The ETF is down some 18% since July, which is not pleasant for long term investors, but is not as bad as the declines seen in other sector ETFs.

Yet, this is an important sector to watch at the current time. If selling accelerates here, we would be looking for more unpleasant surprises for the overall sector.

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