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Correction looms for Chinese stocks

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Chinese stocks have been on fire in the last two weeks but signs that the rally may come to a halt are mounting. The Hang Seng Index advanced 372.92 points to 20624.54 on Tuesday, extending a two week rally to 15.8% from 17,254 points. The Shanghai Composite was basically unchanged on Tuesday, rose only 3.16 points but is still at 52 week high.

As the standard Chinavestor indicator displays, the Hang Seng Index is overbought and is expected to take a break soon. The ETF that tracks the Hang Seng the closest, the FTSE/Xinhua 25 index (FXI), is overbought as well. But the Morgan Stanley China (CAF) ETF is lagging behind the Shanghai Composite, a signal that there is additional upside for CAF in the upcoming days.

Looking at Chinese stocks on the stock level, small cap Sinovac (SVA), eLong (LONG), and American Oriental (AOB) are the most overbought Chinese stocks and thus are ready to take a break. But the list of china stocks in the danger zone is long, so please take a look at the following chart to see the list of the most overbought Chinese ADRs.

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 let's take a look at the most ovesold Chinese ADRs before the bell on Tuesday. As the following chart testifies, there is not a single China stocks that is technically oversold but some China stocks perform well below average. The Chineseo nline game sector is taking a beating following strong rallies in the last theree months. Shanda Interactive (SNDA) and Sohu.com (SOHU) fell heaviliy in the last five trading days, and The9 Ltd. (NCTY) and Changyou.com (CYOU) are have missed out on the rally as well.

 



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