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Oversold China stocks back in play

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money_4 Feb. 5, 2010 (Chinavestor) Today's overbought/oversold (OBOS) indicator may come in play close to the end of the trading day. If markets are going to extend the slide, investors might get some bargain prices at 3:30, hoping for a next week recovery. And this is exactly what we're going to do: run the  OBOS indicator late afternoon and incorporate findings into the "Weekly Stock Buy List", due today at 3:30. P.M.

We will not spend too much time on the overbought China stock list this morning for two reasons.

 

  1. Momentum stocks won't extend rally when market sentiment is substantially negative.
  2. By definition, there aren't any overbought stocks to speak of, on the first place. Baidu.com (NASDAQ:BIDU) and Giant Interactive (NYSE:GA) are the closest to the theoretical highs and BIDU boosts some momentum, but it's all far from being overbought.

 

And while the overbought end is meaningless this morning, the oversold end of the China stock universe is worth talking a closer look at. Stocks we're going to talk about include Home Inns & Hotel Mgmt (NASDAQ:HMIN), Qiao Xing Universal Telephone (NASDAQ:XING), Longtop Financial Technologies (NYSE:LFT), China TechFaith Wireless (NASDAQ:NCTY), Ctrip.com (NASDAQ:CTRP), and China Automotive Systems (NASDAQ:CAAS).

 

By definition, security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. As the following list testifies, a large number of China stocks are trading near theoretical lows, from Home Inns & Hotel Management (NASDAQ:HMIN) to Ctrip.com (NASDAQ:CTRP) and China Automotive Systmes (NASDAQ:CAAS). The relatively large number of such oversold stocks is more of an indication of an overall market weakness than an actual buy signal.

Most oversold China stock list

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What's more interesting at this point is the list of Chinese stocks that have suffered the most in relative terms. Here is why. When the market makes an upside correction after this week's sharp decline, stocks that suffered the most will bounce back up the most. By definition, a sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. As the following list testifies, Gushan Environmental Energy (NYSE:GU) is the stock with the sharpest drop, but trading volume and low price suggests a longer time doom scenario may just well happen here. But we have three Chinese equities that are on both lists - the closest to the theoretical lows and with the biggest decline. These stocks are: ChinaCast Education (NASDAQ:CAST), Qiao Xing Univeral Telephone (NASDAQ:XING), Longtop financial (NYSE:LFT), HSBC Plc. (NYSE:HBC), China TechFaith Wireless (NASDAQ:CNTF), and Home Inns & Hotel Management (NASDAQ:HMIN). These are stocks investors should pay close attention to because they have the highest chance for a turn around.

China stocks with the sharpest weekly drop

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Most overbought Chinese stocks

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