July 7, 2010 (Chinavestor) Looking at the overbought China stock monitor this morning, China Unicom (NYSE:CHU) is clearly in the danger zone, just as is Synutra International (NASDAQ:SYUT). The rest of the telecom sector, including China Mobile (NYSE:CHL) and China Telelecom (NYSE:CHA), are susceptible to a correction, according to the overbought monitor. Investors have to exercise caution with Home Inns & Hotels Management (NASDAQ:HMIN), Sina Corp. (NASDAQ:SINA) and Baidu.com (NASDAQ:BIDU) as well.
China Unicom (NYSE:CHU) has not only been approaching theoretical highs but went from under her trading envelope to the top of it in less than five trading sessions. This suggests downside risk surpasses upside potential for China's second largest mobile carrier.
China mobile (NYSE:CHL), the largest mobile operator in the world, is subject to a correction when the market heads south. While the stock is not terribly overbought the sharp increase in the past five trading days suggest profit taking is coming soon.
China Telecom (NYSE:CHA) had displayed the least of momentum among Chinese telecoms but will not be able to fight the market and is expected to follow the rest of the sector lower. Downside risk is less for CHA than for CHU ot CHL, according to the overbought chart below.
Home Inns & Hotels Management (NASDAQ:HMIN) has been trading near 52 week highs on strong fundamentals, but the rally has to take a breath and when markets contract, NASDAQ listed smaller cap Chinese ADRs suffer. While the stock might experience some profit taking on Wednesday, excellent fundamentals will keep the stock close to record highs.
Sina Corp. (NASDAQ:SINA) is a Chinese internet blue chip that has been enjoying a ride along the market but is susceptible to profit taking on wednesday.
Baidu.com (NASDAQ:BIDU) is not overbought from a pure technical sense but is sensitive to market sentiment and has more downside risk than upside potential ahead of the opening bell on Wednesday.
Chinese stocks of interest on the oversold end include City Telecom (NASDAQ:CTEL), Linktone (NASDAQ:LTON) and China Natural Resources (NASDAQ:CHNR). But investors have to realize that none of them are oversold to a point where they will pop instantly and with the markets heading south, chances are low that any of the oversold China stocks will pop up today.
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.