Using jQuery you can do it like this:
setInterval(function(){
var source = $("#background-images img:first").attr("src");
$('#background-images img:first').appendTo($('#background-images'));
$('#fading-images-container').css('background', 'url('+ source +') no-repeat');
},5000);
html:
<div id="fading-images-container"> </div> <!-- this div will show the fading background images after picking them up from the background-images div -->
<div id="background-images"> <!-- hide this div in the CSS, it's only to hold the images-->
<img src="" alt="" />
<img src="" alt="" />
<img src="" alt="" />
<img src="" alt="" />
<img src="" alt="" />
</div>
To use fading, I would suggest not using background images, but actual images in the div.
I have done it like this in the past:
setInterval(function(){
$('#fading-images:first-child').fadeOut('slow')
.next('img').fadeIn('slow')
.end().appendTo('#slideshow');},
4000);
html:
<div id="fading-images">
<img src="img/home-1.jpg">
<img src="img/home-2.jpg">
<img src="img/home-3.jpg">
</div>