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Attention Value Investors: Online Gamers Are Oversold

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bottom_fishing_1 March 3, 2010 (Chinavestor) One of the most dramatic development of the week is the sudden fall of Chinese online game developers and operators. Industry leader Shanda Games (NASDAQ:SNDA) and her parent company Shanda Interactive) have tumbled since Monday as earnings disappointed. Perfect World (NASDAQ:PWRD) is hurt for the same reason but the appearance of Changyou.com (NASDAQ:CYOU) and The9 Ltd. (NASDAQ:NCTY) on the oversold monitor this morning is a clear testimony that Chinese online game developers are out of favor - at least for the short term. China Telecom (NYSE:CHA) and Vanceinfo Technologies (NYSE:VIT) are overbought, another important technical condition to consider.

Going back to the oversold chart, there may be more short term downside left for Shanda Games (NASDAQ:GAME) or Perfect World (NASDAQ:PWRD), however the sudden drop of most of the players within the sector suggest the sell-off is overdone and a correction will come. Shanda Game (NASDAQ:GAME) is trading clearly below her trading envelope experiencing a sharp decline from $8.30 to $6.41 in just two days. This might lead a technician to believe that a security is oversold. Today is the first day that The9 Ltd. (NASDAQ:NCTY) made it to the oversold list. Weakness of Changyou.com (NASDAQ:CYOU) is unjustified in our opinion - read "When a chart is worth 1000 words". Changyou.com (NASDAQ:CYOU) is among the elite online gamers that reported revenue AND earnings growth for the fourth quarter of 2009.

Shares of American Dairy (NYSE:ADY) have started to level off and established a bottom above $21.

Most oversold Chinese stocks

OS-201033


The overbought end of the China stock universe tells investors more upside is possible! Shares of China Telecom (NYSE:CHA) might come to a halt- large cap stocks rarely reach theoretical highs. But smaller cap China stocks are here to make investors happy, assuming market conditions contribute. Vanceinfo Technology (NYSE:VIT) advanced too much too fast according to the following chart, so you better exercise caution.

Most overbought China stock list

OB-201033

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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