I’m sure you’ve heard the loud, woe is me, call from the banking establishment over the past few months. I’m not here to break the story because it really is yesterday’s news. Instead, my purpose is to update you on all the action and determine if perhaps there is any light at the end of the tunnel. Without further delay, here is what’s on the agenda:

· Banking industry headlines
· Technical thoughts on the Bank Index (BKX)· Summary and highlight of opportunities

Banking Industry Headlines
In recent news, the Fed took safety measures to pull the banking establishment out of its depressive credit crunch bunker by lending over $20 billion to banks. This is the first of a four-round auction designed to relieve the credit pressures that currently exist in the marketplace.

So far, the Fed has stated that it hauled in $61.6 billion in loans from over 93 bidders. Those winning bidders will see their loans mature in 28 days or so.

Initially, the stock market bought in and drifted higher. Unfortunately, buying support has failed to materialize and major indices such as the Dow Jones Industrial Average as well as the Bank Index (BKX) appear to be heading in a bearish direction.

Large banks both here and abroad, primarily in Europe, have written off billions of assets due to their much-regretted bet on mortgage loans. Without access to the much-needed capital, lending standards may tighten.

Although this would mean fewer assets on the books, we can start to expect a more realistic approach to lending. One in which other banks spend less time eating away at each other’s business and more on actually holding standards that would allow them to lend at rates higher than their cost of funds.

Catch 22
Unfortunately, high standards would result in less business and disgruntled investors. The banking industry is certainly backed into a corner that it may not be able to recover from for quite some time.

To make matter worse, the U.S. and perhaps the global economy is preparing for slower economic growth in the years ahead.

In my last review of the banking industry dated 10/18/07, titled Banking Industry Slammed: More Punishment Ahead, I stated the following when the Bank Index (BKX) was trading for $102.90:

“The bottom line here is that you should stay away from bank stocks to avoid getting trapped from the occasional short lived buying swings. The overall downward trend is just too strong, so don’t even bother fighting it. The situation will continue to get worse before they get better.”

At that particular point in time, I noticed that the index had already fallen from its peak of around $120 and was trading in what we technical analysts refer to as a “symmetrical triangle” pattern. In most cases, the trend prior to consolidation often resumes, leading me to believe that the risk-to-reward ratio heavily favored those who were short or buying put options within the industry.

Boy was I dead on!

Honestly, I don’t mean to dance in an egotistic way or shout, “I told you so!” However, it is often the case and necessary to retrace your thoughts and follow-up on the advice given to my readers.

So, you’re probably thinking where do things stand today. Well, since my bearish call, the BKX Index (BKX) broke down as expected through major support near $102 into a new trading range in which $94 became the new floor.

The $94 melted away like a hot knife through butter. I had to expand the chart out a full decade to find the next levels of major support. Ironically enough, they are in $10 increments found at $80, $70, and finally $60.

$60 per share is the ultimate firewall. It has been tested more times than the other price barriers. Below this and you’re looking at $45, then $30. Honestly, I don’t think we’ll get to these levels anytime soon. With that said, you should continue to expect further weakness down the road.

How to play the setup
Our recommendation here would be to buy put options on banking stocks that mirror what this banking index is doing.

Good investing,

Stephen Oakes
Editor, Volume Spike Alert & Black Sheep Trader