Published: August 30, 2010

As the economy continues to slide, regional banks are failing at an alarming rate. So far, in 2010, 109 banks have failed. This brings the total number of bank failures since 2007 to 277.

As a result, many regional banks provide excellent shorting opportunities. California-based East West Bancorp (Nasdaq: EWBC) is one such candidate.

The holding company for East West Bank, EWBC offers a full range of personal and business banking deposit and loan services. Although the company has thus far managed to maintain profitability, this picture may be about to change.

EWBC appears technically vulnerable. The stock is in an intermediate-term downtrend and falling. It is currently testing an important resistance zone between $14.10 and $15.00.

In March 2009, shares of EWBC hit a low of $3.22. By November, on news EWBC acquired United Commercial Bank of San Francisco, the stock gapped up to resistance near $14.10. EWBC continued climbing, hitting a high of $20.53 in April 2010.

However, encountering resistance at this level in June, the stock broke its major uptrend line from the March 2009 low.

The flat 10-week moving average also bearishly crossed below the flat 30-week moving average. EWBC is currently below both moving averages.

The stock is currently clinging to historical support dating back to 2009. However, if EWBC falls below $14.10 near the intersection of the lower Bollinger band, the stock could close the gap created from its November jump. In this case, EWBC may not find new support until it hits the mid-$10 range.

The indicators are bearish. MACD has been on a sell signal since May. In June, the MACD histogram appeared to peak in negative territory, but has so far stayed negative. Now the histogram appears to be again growing larger in negative territory.

In May, the major relative strength index (RSI) uptrend line broke. RSI has since been in a downtrend. At 45 and falling, it is below the key 50 juncture.

Stochastics appears to be on the verge of giving a sell signal and could fall sharply.

EWBC also has an uncertain fundamental outlook. With increasing expenses, the company issued cautious guidance for the upcoming third quarter.

For the full 2010 year, analysts project revenue will stay essentially flat, increasing only +0.8% to $887.1 million compared to $879.9 million in 2009.

But revenue is expected to drop -9.2% to $805.5 million by 2011. For 2010, analysts project the bank will earn $0.77 a share, which means the stock is selling for almost 20 times earnings at current prices.

In addition, the bank appears overvalued on several other metrics.

The company has a projected five-year PEG ratio of 2.3. A PEG of 1.0 or less shows attractive valuation.

EWBC also has a high price to sales (P/S) ratio of 6.0. A P/S of one or less is desirable.

Action to Take--> Given that EWBC is richly valued, has an uncertain growth outlook and shows technical vulnerability, this regional bank is a good short candidate if it falls below important historical support.

I recommend placing a sell-on-stop order at $14.08, below the lower level of the support zone. This means if EWBC does not hit or fall below this price, the position will not be entered. I also recommend a stop-loss at $16.98, near important resistance represented by the flat 30-week moving average and the intermediate-term downtrend line. My target is $10.62, near important historical support dating to February 2009.

-- Melvin Pasternak
Editor, Double-Digit Trading
Co-Editor, Trade of the Week