Banks started to sell off Aug. 2, a full week before the

S&P 500 Index

and

Nasdaq Composite

rolled over and entered their current downswings

. While the major indices have put up a good fight on the way down, the KBW Bank Index (BKX) just keeps ticking lower and lower, day after day, relentless in its downward trajectory.

Even though the bank index hit an oversold technical level more than two weeks ago, the decline continues unabated, ignoring the usual conventions of a two-sided market. This deadly persistence is now getting everyone's attention, and a few folks are drawing ominous comparisons with price action we saw in the summer of 2008.

While another free fall isn't likely, the current decline marks a significant turn in the broad recovery that began in March 2009. In a word, if the banking stocks don't find a healthy dose of buying interest in the next few weeks, they're likely to drag down the broad market in another leg of the broad correction that began in April.

Unfortunately, given adverse seasonality and relentlessly weak economic data, that looks like the highest-odds outcome right now. This downward spiral isn't too shocking, because I've been looking for new 2010 lows in the September-to-October period since the first half of the year. The real question is this: What happens after the November elections?

It's still my view that the broad market will pound out a major low just before or around that critical period, and then embark on the next leg of the 18-month bull market. Indeed, this should yield a huge opportunity to buy stocks at major discounts, but it's an open question as to whether the bull tide I expect at year's end will also lift banks and other financial institutions.

The KBW Bank Index sold off from 121 to 18 and bottomed out in March 2009. The subsequent recovery topped out at the 38% retracement level of the bear-market decline in April of this year and rolled over in a significant downtrend that. Within this, the chart shows four bounce attempts (red circles) near the 200-day moving average between May and August.

The index broke that support level about three weeks ago and dropped into intermediate support at the February low last week. It's found little buying interest in the last five sessions and appears headed for the November 2009 low (blue line) at 41.42. That should offer greater insulation from the endless selling pressure and support a decent-sized oversold rally.

To be frank, I would hate to see this downtrend spit out a series of wide-range selloff bars that suggest wholesale capitalization. Rather than to induce a climactic low, this price action might feed on itself and drag the index all the way down to $30, which it last struck in April 2009. I believe that would have a devastating effect on investor psychology and on the broad recovery.

You'll recall that

Wells Fargo

(WFC) - Get Report

is

one of the "good banks"

because it took fewer speculative risks during the run-up into the 2008 credit collapse. That commendable behavior certainly isn't helping them now, as the stock is spiraling downward in a nearly vertical pattern and trading at a 52-week low.

However, things aren't as bad as they look, because the recovery prior to this downturn had been much stronger than the broad sector: Wells-Fargo had regained more than 70% of its bear-market decline, as opposed to a 38% recovery by the bank index. Therefore, this stock can fall further and faster than its peers but still retain a few bullish characteristics.

Unfortunately that isn't too comforting for all the shareholders who relied on the

Buffett

brand when they bought this previously rock-solid bank. It seems poor Warren has had a tough time lately, with his $5 billion

Goldman Sachs

(GS) - Get Report

investment likewise losing value at a rapid pace. It shows there are no absolutely guarantees in this miserable 2010 market.

How close is Wells to finding support and resuming its upward trajectory? The stock is now sitting less than 2 points above the June 2009 low (blue line) at $22.08. That level marks a good spot to start a major recovery attempt. However, it's time to ship if shares break to even lower ground, because the next downswing might not stop until the mid-teens.

Bank of America

(BAC) - Get Report

provided the technical clues needed to exit positions before it embarked on the current nosedive. The stock sold off from $55 to $2.53 during the bear market and entered a recovery that topped out at $19 in October 2009. This marked just a 30% retracement of the decline, less than the broad index and the majority of its banking peers.

The stock then carved out a classic double-topping pattern with support (red line) at $14. It broke this level in mid-July, churned higher for two weeks, and then dropped like a rock into the current downtrend. The decline has now dumped Bank of America into a new 52-week low, with absolutely no evidence that it's getting ready to bottom out and head higher.

The downswing just crossed the 38% retracement point of the 2009 recovery, and the falling price is slowly pulling toward June 2009 support under $10.50. This magnet might set up an unpleasant date with "round number" support at $10. So, down the road, I expect we're going to see the fight of the century as this stock tries to hold onto double digits.

Finally we look at

JPMorgan Chase

(JPM) - Get Report

, another well run bank that no one wants to own right now. I covered this issue in April, pointing out a massive trendline that came into play when the company reported first-quarter earnings. As it turns out, that event triggered a major downturn, leaving behind a recovery high that hasn't been exceeded in the last four months.

The stock broke 200-day moving average support a few weeks later and bottomed out near an 11-month low at $35. The subsequent recovery effort was predictable, with new resistance at the moving average killing the upside in early August and triggering a renewed downtrend that's now testing the two-month low.

It's ironic to say, but this stock makes the bank-sector leadership list, because it's the only major player that's still trading above the early-July lows. However, I doubt that price level will contain this downtrend. More likely to stop the bloodshed, at least for a while, is stronger support at the declining-lows trendline under $34.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in

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, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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