March 18, 2010 (Chinavestor) Most of the action has been taking place on the oversold end of the China stock universe lately. The -37.3% drop of Fuqi International (NASDAQ:FUQI) looks way excessive and calls for a quick correction. The dramatic fall of HQ Sustainable Maritime (AMEX:HQS), American Oriental Bioengineering (NYSE:AOB) and Acorn International (NYSE:ATV) suggests that these shares are oversold and a technical rebounce is likely. It is important to keep in mind that oversold is not the same as bullish. What oversold means is that the fall was too fast and too much and a technical correction is likely to follow.
Shares of Melco Crown Entertainment (NASDAQ:MPEL) paused on Wednesday with no indication if the rally is her to last. Shares of China Digital TV Holding (NYSE:STV) advanced with heavy volume but it may be just as MPEL was a day before: the rally is already exhausted.
Most overbought Chinese stocks
Most of the fall is earnings related on the oversold chart below. Fuqi International (NASDAQ:FUQI) fell apart on allegations that it cooked books. Yet the -37% fall is way unusual and a bounce back is in the cards. Read: Don't panic FUQI investor!
Weak earnings of American Oriental Bio (NYSE:AOB) send the stocks tumbling. While we agree that the latest financial report doesn't support a stock price of $4.50 or more, the significant drop is crying out for a correction. Read: AOB down on earnings, outlook.
Acorn International (NYSE:ATV) looks similar to AOB from a technical point of view. But while AOB numbers were somewhat descent, ATV numbers look really bad. Read: Five reasons to shun ATV after 2009 Q4.
China Sky One Medical (NASDAQ:CSKI), General Steel (NYSE:GSI), Jinpan Int. (NASDAQ:JST), WuXi Pharmatech (NYSE:WX), and HQ Sustainable Maritime (AMEX:HQS) are all down due to fundamental weakness. Related story: WuXi Pharma lacks growth, promises more.
Most oversold China stocks
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.