Last week we published a study that looked at 10- and 30-day moving averages and their crossing patterns to find momentum stocks. We continue with some technical analysis today by introducing the Overbought/Oversold techincal indicator. The one we use gives investors a gauge of the market in a snapshot by laying down all Chinese ADRs on a single paper. This method makes it very easy to find stocks that are out of their normal trading characteristics; thus offering trading opportunities.
First, let's start out with definitions; what does Overbought and Oversold mean?
Overbought: A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the stock is trading out of its trading envelope and is approaching the theoretical high. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.
Oversold: A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.
Now, here is a snapshot of selected Chinese ADRs - before the market opens.
By looking at the chart above, it's obvious that the Chinese telecom sector have suffered a heavy blow. China Unicom (CHU) is hurt in particular, and given the size, the position and the direction of the latest price move, I don't think CHU has hit bottom yet. China Mobile (CHL) looks to be a safer bet for today.
Long time favorite Sina Copr. (SINA) broke trend and started to pull back yesterday. Still, if any stock that looks good for today, it's going to be SINA, YZC and HNP and NTES.
Talking about NetEase, China's second largest online game developer after Shanda Interactive (SNDA). The lanuch of Tianxia II, a home developed game of NTES, is keeping investors excited about the prospects of the game. As a result, NTES is up 5.2% in the last five trading days while the broader China ADR Index measured by the FTSE/Xinhua 25 Index (FXI) lost 6.49% during the same time.
As the saying goes: don't fight the market. Applying it to today's trading day: buy some NTES and make money!