China stocks have been on fire in the last week sending multiple Chinese ADRs to 52 week highs. But the pace of the rally looks unsustainable for many Chinese stocks according to the Overbought indicator.
Take a look at eLong (LONG), the small cap online travel agent. The ADR price jumped 2.92% on Friday, a highly unusual move for his largely inactive stock, drawing attention to the ADR that something is finally happening.
But the ones that are worth paying attention are larger cap, liquid stocks such as HSBC Plc (HBC) Huaneng Power (HNP). Both are overbought according to the indicator and thus are subject to a weakness on Monday. Sinovac (SVA) is an extremely volatile stock, may fall 30% in two days.
Suntech Power (STP) is a nice surprise, a rally that we predicted successfully on July 10 - (China solar stocks offer big reward after huge dive).
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.
Exhausting the overbought china stock list, let's take a look at the most oversold Chinese companies. There is not a single China stock that is technically oversold. Yet it is imperative to see stocks that underperformed the rest of the China stock universe. Take a lok at two sectors: telecoms and online gamers. All three telecom plays have been on the slide last week, China Mobile (Hong Kong) Ltd. , (0941.HK) (CHL), China Unicom Ltd. (0762.HK) (CHU)(600050.SS) and China Telecom (CHA) included.
The Chinese online game sector is under pressure, prominent stocks such as Shanda (SNDA), Changyou.com (CYOU) skid last week. Sohu.com is down on earnings and as such will remain under water for some time. NetEase (NTES) was neutral for the week while Giant Interactive (GA) pared better, just to catch up somewhat with the overall sector.
Oversold condition may bring out trading opportunities though. When the Shanghai Composite Index <.SSEC> keeps hitting 2009 records just as is the Hang Seng Composite, oversold sectors can galvanize and catch up with the rest of the stock universe. In this particular case, it looks as if the telecom sector will do that first and will have to wait for earnings from the online game sectors before predicting any particular direction for the Chinese online game stocks.
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.