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Chinese stocks stretching too thin

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watch_out July 8, 2010 (Chinavestor) Two outstanding market days on Tuesday and Wednesday send some Chinese ADRs overboard, suggesting downside risk surpasses upside potential for China Unicom (NYSE:CHU), Synutra International (NASDAQ:SYUT), China Mobile (NYSE:CHL), and China Telecom (NYSE:CHA). Other momentum stocks with questionable support include China Transinfo Technologies (NASDAQ:CTFO), Huaneng Power Int. (NYSE:HNP), Solarfun Power (NASDAQ:SOLF), Focus Media Holdings (NASDAQ:FMCN) and Advanced Battery (NASDAQ:ABAT), just to name a few. For a complete list of overstretched Chinese stocks, look up the chart below.

The chart depicts Chinese ADRs with the largest relative jump in the last five days. It is obvious that China Unicom (NYSE:CHU) remains overbought and is susceptible for more decline. Weakness for the short term is not limited to the second largest Chinese mobile carrier though; China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) are also in the danger zone.

The overbought chart this morning depicts Chinese ADRs with the largest uptick for the week. While most of these stocks are far from theoretical highs, the sudden increase in stock price may indicate a stock is overbought. China Transinfo Technologies (NASDAQ:CTFO) is similar to Huaneng Power Int. (NYSE:HNP), both Chinese ADRs went from oversold to the low end of the trading envelope. While more upside is likely for the mid term, short term momentum is most likely receding.

Solarfun Power (NASDAQ:SOLF) is more like Focus Media Holdings (NASDAQ:FMCN) and Advanced Battery (NASDAQ:ABAT) from a technical point of view, all these companies are trading comfortably within their trading envelopes. This suggests more upside will require more than just a technical correction. Upside for these stocks looks limited at this point.

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The most oversold end of the China ADR universe is missing action thanks to a string of strong market days.

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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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