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Careful with overbought China stocks!

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warning1 June 22, 2010 (Chinavestor) China stocks in the danger zone: China Unicom (NYSE:CHU), Ctrip.com (NASDAQ:CTRP) and New Oriental Education (NYSE:EDU) have approached theoretical highs while 51job Inc. (NASDAQ:JOBS) have risen too fast, too much - according to the overbought monitor. Despite recent advances, shares of Sinopec Shanghai Petrochemical (NYSE:SHI), Gushan Environmental Energy (NYSE:GU), Zhongpin Inc. (NASDAQ:HOGS), and NetEase.com (NASDAQ:NTES) are not overbought.

Oversold stocks to watch out are WuXi Pharmatech (NYSE:WX), China Fire & Security(NASDAQ:CSFG), and Ata Inc. (NASDAQ:ATAI).

Details: Shares of China Unicom (NYSE:CHU) jumped over 6 percent on Monday - but became overbought! A pullback looks imminent for the stock.

Ctrip.com Int. (NASDAQ:CTRP) is another China stock that have been enjoying a ride as of last week - but is not dangerously close to Theoretical Highs - see glossary on the bottom of article. While Ctrip.com (NASDAQ:CTRP) may continue to rise on a strong market day, index futures point to a lower open this morning...

51job Inc. (NASDAQ:JOBS) have risen too fast, according to the overbought chart below. The sudden advance from $20 to $23 in just four trading days is pushing the envelope for JOBS. Profit taking is likely to follow SOON.

New Oriental Education & Tech. Group Inc (NYSE:EDU) is another stock of concern after a 10 percent advance last week plus Monday. The stock is trading way above its normal trading range and is unlikely to fight the market on Tuesday. A pullback is certainly a possibility.

Stocks with less dramatic jump include Sinopec Shanghai Petrochemical (NYSE:SHI) suggesting a more gradual advance is possible.

Gushan Environmental Energy (NYSE:GU), a Chinese bio diesel producer, and Zhongpin Inc. (NASDAQ:HOGS) have advanced not too aggressively in the last five trading sessions, leaving more room to the upside. However smaller cap China plays are unlikely to fight the market.

NetEase.com (NASDAQ:NTES) and Perfect World (NASDAQ:PWRD), online game developers and operators, were one of the best performing China ADRs on Monday. While a nine percent advance for NetEase.com (NASDAQ:NTES) may sound excessive, the stock has more room left to the upside according to the overbought monitor. Though that advance requires another positive market day.

OB_2010622

WuXi Pharmatech (NYSE:WX) has been approaching theoretical lows, but is not oversold yet, technically speaking. The same is true for China Fire & Security (NASDAQ:CSFG), another China stock with more downside potential.

Ata Inc. (NASDAQ:ATAI) fell from $3.5 to $3.2 in four days and this is unusual for this low volume, under the radar stock. But insufficient trading volume renders this stock unsuitable for retail investors.

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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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