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Large cap China stocks in danger

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watch_out June 25, 2010 (Chinavestor) We're witnessing a highly unusual scenario on Friday: large cap China stock took the lead on the overbought screen below. Huaneng Power Int. (NYSE:HNP), Sinopec Shanghai Petrochemcial (NYSE:SHI) and China Unicom (NYSE:CHU) are on the top of the overbought screen along with Home Inns & Hotels Management (NASDAQ:HMIN). Despite a significant jump on Thursday, Shanda Games (NASDAQ:GAME) is not overbought. China Life Insurance (NYSE:LFC) is another large cap to watch on Friday.

The oversold screen suggests more downside is possible for Hurray! Holdings (NASDAQ:HRAY), JA Solar Holdings (NASDAQ:JASO) and Linktone Ltd. (NASDAQ:LTON), despite sizable losses for the week.

Back to the overbought screen: history has taught us that large cap China stocks don't get to reach theoretical highs too often, or if they do they don't stay overbought for a long time. This in turn suggests, along with a 1.55 percent decline in Hong Kong earlier today, that Huaneng Power Int. (NYSE:HNP) is going to surrender some of its gains for the week on Friday.

Hong Kong and Shanghai listed H- and A-shares of China Life Insurance (NYSE:LFC) advanced 0.14 percent and 1.0 percent earlier today, respectively. The stock is far from being overbought, according to the chart below, leaving ample room for the upside for the stock.

OB_2010625

Hurray! Holdings (NASDAQ:HRAY) is the most oversold China ADR at the moment but hasn't reached theoretical lows yet. This suggests downside risk prevails for the stock.

JA Solar Holdings (NASDAQ:JASO) is the most oversold China solar play but there is no guarantee the stock has hit bottom yet. Energy prices and the euro have been driving Chinese solar stocks lower with not much visibility going forward.

Linktone Ltd. (NASDAQ:LTON) has more downside risk then upside potential at this point as well.

OS_2010625

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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