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Don't panic China stock investor!

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declineNov. 27, 2009 (Chinavestor) "Black Friday" should be all about shopping at crazy low prices but this one started out as "Red Friday" for China stocks. The Hang Seng index fell 4.84% with every single stock out of the 44 member index finishing in the red. News that Dubai's flagship developers are nearing to default on debt raised doubts about the pace of the recovery of the global economy. Yet China stock investors should NOT panic! What comes down will always come back, and I look at today's situation as an opportunity to buy rather then follow the crowd. Stocks mentioned in the report will include AgFeed Industries Ltd (NASDAQ:FEED), Origin Agritech Ltd. (NASDAQ:SEED), WuXi PharmaTech (NYSE:WX), China Automotive Systems (NASDAQ:CAAS), Yanzhou Coal (NYSE:YZC), Rino International (NASDAQ:RINO), 51job, Inc. (NASDAQ:JOBS), Ctrip.com (NASDAQ:CTRP), China Unicom (NYSE:CHU), Aluminum Corp. of China (NYSE:ACH), China Life Insurance (NYSE:LFC), Linktone Ltd (NASDAQ:LTON), and Baidu.com (NASDAQ:BIDU). Remember that stock that are going to fall the hardest will recover the most, assuming underlying fundamentals for the stock is sound. So here is my advice for today:

 

 

  1. If you have cash to spend, buy into weakness. The Weekly Buy and Sell Stock List, published every Friday exclusively for Chinavestor.com clients, will be loaded with stocks that are going to bounce back strongly the next week.
  2. If you are already invested, sit tight and don't sell - unless you have a very speculative stock portfolio where you're unsure about the quality of your assets. Stocks with sound revenue and earnings growth will be less effected and weather the storm well.

Going stock specific, expect solar stocks and petrochemicals to fell hard today based on fundamentals. Read our related story: List of China stocks to avoid when oil falls.

 

Based on technical indicators, overbought stocks are vulnerable when the market falls. Another set of stocks to suffer today are stocks with short-term momentum, stocks that did well in the last few days. My advice is not to sell these momentum stocks if the strong performance in the last few days were driven by fundamentals. take a look at Origin Agritech Ltd. (NASDAQ:SEED) for example. The stock jumped 111% in the last five days and is certainly vulnerable today. But if you look into huge underlying volume and the news that sparked such a jump, rest assured Origin Agritech Ltd. (NASDAQ:SEED) is going to come back strong once the dust settles. Origin Agritech Ltd. (NASDAQ:SEED) is very similar to AgFeed Industries Ltd (NASDAQ:FEED) from a technical point of view. Both stocks had a remarkable performance since Monday and are expected to suffer terribly today. But don't panic, Origin Agritech Ltd. (NASDAQ:SEED)  and AgFeed Industries Ltd (NASDAQ:FEED) are poised to do well.

As the following chart testifies, 51job, Inc. (NASDAQ:JOBS) and China Life insurance (NYSE:LFC) are among the most vulnerable stocks for today followed by Linktone Ltd. (NASDAQ:LTON) and Baidu.com (NASDAQ:BIDU). Though Ctrip.com (NASDAQ:CTRP) is further down the list, this Chinese online travel agent was among the best China ADRs on Wednesday by advancing $.98 and thus is susceptible for a sizable pullback. Aluminum Corp. of China (NYSE:ACH) H-shares fell hard in Hong Kong indicating a poor performance for today on the NYSE. But again, these stocks are about to come back once the dust settles.

Short term momentum China stock list

Momentum_1127

Another set of stocks in danger are the most overbought China stocks. These stocks have been strong for a longer period of time and ran ahead of the curve. WuXi PharmaTech (NYSE:WX), China Automotive Systems (NASDAQ:CAAS) and Yanzhou Coal (NYSE:YZC) have been very strong in the last 6 months. Investors will have to give some time for these stocks recover after today's fall, according to the overbought indicator below.

Most overbought China stock list

OB-1127

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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.



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