This is the introductory post to a series of trade setups for the Bank At Risk featured in the subscription document Italy Exposure Producing Bank Risk. These trade setups are for professional and institutional subscribers only, for they are relatively advanced. Those who have not been following the European bank research and opinion of the past 30 days should reference the following in reverse chronological order.

1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
3. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
4. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
5. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
6. Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par Using 30x+ Leverage: Bank Collapse is Inevitable!!! 

Below are the thoughts of one of the BoomBustBlog resident European traders, annotated. The following post (within 24 hours) will contain charts and option position setups for susbscribers.

Setting Up A Potential European Bank Run Trade

20110725_-_CAC_Monthly

Interestingly enough, and sounding a bit different from BOOMBUSTBLOG fundamental analysis, it is really difficult to find clear TECHNICAL evidence in the short term for the Subject Bank at Risk.

The longer trend lines have being violated. The violent down move, has been broken in 2010, the uptrend from the 2009 (by a significant amount of euros !!) low seems over as well.

So we have to look at the more recent past and 60 now looks as the big resistance level, it was 2010 (Q1) high and 2011 YTD (Q1) high as well. On the downside, 2010 lows held as well, and I drew on the graph 2 lines @42 and 46 which look significant.
We have not reversed all of the down move last week, which seems to indicate that the market doesn’t want to call it over and squeeze all the shorts quickly.

It’s very tough to make a short term call.

However, THE SUBJECT BANK traded off the highs on Friday to close just below it.

In my personal view, THE SUBJECT BANK is more a systemic risk play because though I’m negative on the industry's future earnings, THE SUBJECT BANK doesn’t seem to have a particular short term problem and
banks accounting bag of tricks is not empty yet.

I have addressed this in this post, in detail. It is not a straightforward topic.

Of important note, as well, the 10Y BTP, which I called for a quick 5.40-5.50 move and actually traded over 6, came back below that 5.50 level. It was indeed overextended in the short term as it exceeded my level. We’ve seen the low 5.20s on Friday but it bounced back then, almost as anybody could have expected...

Because as we know 10Y BTPs broke the 5% level decisively, and I explained to you my view of why I could only see getting it worse, if only for VAR reasons, absent massive intervention in the market by governments (active BTP buying, short selling banned in CDS AND bonds...which need to push 10Y BTP below 4.5% and on its way to 4% to declare victory). That’s not my main scenario.

So in such a context, we can expect banks to trade down, even if on the chart they seem resilient. The  resistance having worked in Q1, and selling on strength worked this year (when we hit Bollinger highs) can give "optimism" to a short position. I say "optimism" because alas if this happens, it probably means our system is one step closer to its destruction.

Risk Reward selling in the middle of the 2010/2011 range is not a 100% proof recipe for success.

On the CAC40 monthly chart, the uptrend line could have been clearly broken if we stayed last week at the lows, but the bounce near that trendline leaves all possibilities open, with next week being important to me. Similarly SPX is holding well and could go up to 2007 highs above 1500. Problem is Nasdaq is already there... so is Nasdaq breaking thru resistance and leading at least a test higher for indices ? But that would look bullish for equities...

Clearly I’m not bearish (yet) on equities, at least not on a chart point of view, and equities are still the BEST hedge against inflation (save for the indebted and overleveraged firms, which is a whole lot of them.). Firms with no debt, like AAPL ARE a hedge to inflation.

So how can we play downside for THE SUBJECT BANK?

Well the prudent investor, can just opt for a "BETA trade" sell THE SUBJECT BANK against CAC40 beta-adjusted.

Buy put/put spreads to play for the systemic risk especially given the dire situation on the PIIGS debt markets who can be once again, showing the lead to the equity markets.

Disclosure: Eurocalypse has no positions in the stocks referenced above, doesnt trade CDS, and doesnt intend to take positions in those financial instruments"
"Eurocalypse actually owns a small quantity of Italian (inflation-linked) bonds at its own risk. Please do your own due diligence and trade at your own risk