Analysts wasted no time calling the bottom when bank stocks lifted off deep lows about three weeks ago, but unfortunately

I believe those bullish predictions are premature

. The sector's biggest players, as well as the smallest regionals, will likely face months of uncertainty before resuming the upward path traveled after the bear market ended in early 2009.

So, no -- despite the recent rally, the bearish arguments against banks have not changed. In a word, draconian financial reform and a chronically weak economic environment will cut into profits at the same time that these institutions unwind the last mountains of bad debt accumulated during the 2008 credit collapse.

In addition, we have a

Federal Reserve

that's committed to an easy money policy for the foreseeable future. That means there will be no interest rate hikes for the next six to nine months, at a minimum, which will in turn deny bankers the obvious perks that come with charging customers higher prices for loans and everything else that revolves around the credit mechanism.

So why are Wall Street's talking heads telling Main Street investors to load up on the banking sector right now? My answer is cynical and to the point: What else do you expect? These folks earn their daily bread at the heart of the banking system, and it's a matter of self-survival to foster the illusion of a dramatic sector recovery.

The KBW Bank Index (BKX) slid from an all-time high at 121 in 2007 to a bear-market low at 17.75. The subsequent recovery unfolded in three waves, with the final rally burst having topped out at 59 in April of this year. The index then ground lower in a steady decline that dropped into a seesaw pattern in May.

Sharp price swings have kept short sellers off-balance since that time, all the while raising bullish hopes each time an intermediate low has been pounded out and the index has started to move higher. This is a perfect environment for swing traders -- buying support and selling resistance -- but a terrible one for return-conscious investors looking for steady and secure gains.

Note that the 200-day moving average has defined price action throughout this four-month chop fest. This long-term indicator has slowly rolled over while the price has crisscrossed in a series of lower highs and lower lows. You can see the lows have been more violent than the highs, generating a broadening formation (red lines in the chart above) that's been the cause of sleepless nights for sector longs.

In addition, despite the 15% rally since August, there are few signs of accumulation. In fact, the index posted its highest-volume down day in more three months during Friday's options-expiration-driven session. The good news is that I don't believe this bounce is over yet, and that there's still time to book profits if you bought into the sector during the recent love fest.

Although the chart shows many resistance levels, 51 stands out like a sore thumb as the dividing line between bull and bears. For starters, this area defines the barrier created in May when the index broke the low of the flash crash. I count four failed attempts to remount this line-in-the-sand since the breakdown (red circles) and won't be surprises if the index heads straight into that barrier as we head into October earnings season.

Then there's the major problem created by the five-month series of lower lows. Any technical improvement will need to show two distinct characteristics. First, the index needs to break out above four-month resistance, posting higher-than-average volume. Second, it needs to print at least one higher low that supports a stable bottom pattern.

This second requirement can be fulfilled prior to the first one if the index sells off right here and then holds above the August low near 42.70. That would have been a common sequence in prior years when price action wasn't dominated by computer programs. These days, however, markets tend to move from point A to point B, in straight lines, with few interruptions.

My gut tells me this recovery attempt will eventually fail, perhaps when quarterly results confirm just how vulnerable these companies are in this brave new regulatory environment. With that in mind, my advice here is simple and logical. Other sectors have carved out decent recoveries since August and deserve your capital far more than these chronic losers.

But what about the fate of the regional banks, which have traveled a slightly different path from that of the big money-center banks in the last three years? For starters, let's agree this is more of a stock-picking arena, given that pockets of U.S. economic strength could support strong rallies in local players that took fewer risks during the real estate bubble.

The

SPDR KBW Regional Banking ETF

(KBE) - Get Report

recovered half of its bear-market decline, topping out near $30 in April of this year. The flash crash was particularly violent to this instrument, with most data services showing a one-day range of between $22 and $29.50 (red lines). The fund broke the low end of that zone in August, dropped to $20.80 and then jumped higher about three weeks ago.

This is marginally bullish, because it signals a 2B reversal that often denotes a significant bottom. The pattern has shown little progress since that time, and there's no volume evidence -- so far, at least -- that institutions have begun to pick up shares. However, the short-term uptrend is still intact, and higher prices look like the path of least resistance into October.

Resistance punched out by the series of lower highs since May (blue line) is converging with the 200-day moving average near $23.70. This level marks the obvious testing ground for this instrument, and a high-volume breakout has improved the technical tone and set the stage for a continued recovery into the May 20 gap at $26 (green circle).

More likely, though, the fund will attract aggressive short sellers at or near that level, which would yield a selloff that drops the price into the August low. The best outcome, if that happens, tracks the technical scenarios I outlined for the KBW Bank Index. In other words, look for a higher low that establishes a basing pattern for another recovery attempt, or for a major failure that continues the downtrend.

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

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At the time of publication, Farley was 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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