The bank stocks are vital to the market. The banking industry is basically the barometer of the broader economy. The economy expands when banks are healthy and lending. Conversely, the economy contracts when banks are sick and credit is tight.

Needless to say, the Bank Index ($BKX) is always on my radar.

Obviously it's pretty bad in the real world right now. It's damn difficult to get a loan and sometimes even difficult to get your deposits out of a bank (Read: IndyMac - IDMC).

Much of the bad news in the real world has already been discounted in the financial world. The BKX is off by about 35% in the past year, but is up by about 50% from its July 15 low.

So, the question is:

Are things in the financial system getting better or are they worsening?

I think we're going to get the answer to this question real soon and it's going to have implications for the broader market.

The BKX is at a point where it must break higher or rollover. It's not going to just sit here. The BKX goes higher if things get better or it breaks lower if the financial system worsens. It's just that simple. The set-up is equally simple and, above all, actionable.

A break in the BKX above 72 keeps the market in rally mode. Conversely, a breakdown below 64 to 65 brings back the bears.

The set-up in the BKX can be used as a broad market indicator and, of course, a trade itself. Options are available on the BKX, but they're illiquid. I wouldn't trade them. Instead, you might set-up some trades in the underlying stocks of the BKX. Some of the names include:

BAC, BBT, BK, C, CMA, FITB, JPM, KEY, MTB, NCC, NTRS, PNC, RF, STI, STT, USB, WFC, WM, and ZION

A quick analysis of some of these names will reveal which are the best to buy in the event of a breakout in the BKX and which are the best to short in the event of a breakdown.