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China stocks stretching too far

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warning3 July 12, 2010 (Chinavestor) There are a good number of Chinese ADRs in the danger zone ahead of the trading day on Monday, according to the overbought China stock monitor. Huaneng Power Int. (NYSE:HNP), China Finance Online (NASDAQ:JRJC), New Oriental Education & Tech. Group Inc (NYSE:EDU), Solarfun Power Holdings (NASDAQ:SOLF), and E-House Holdings (NYSE:EJ) are clearly overpriced for a market that heads to a lower opening.

Huaneng Power Int. (NYSE:HNP) rose over 4 percent on Friday, a company that is the largest independent power producer in China. Large cap stock like HNP don't get overbought that often and not to a level where HNP is right now. The pullback is imminent, suggests the overbought monitor below.

Small cap China Finance Online (NASDAQ:JRJC) is harder to predict but one thing is for sure: the stock price is dangerously close to theoretical highs at a time when index futures point to a lower open ahead of earnings. Risk level is very high for JRJC right now.

New Oriental Education & Tech. Group Inc (NYSE:EDU) rose too fast, too much - according to the overbought monitor. While more upside is possible for the long run, downside risk now exceeds upside potential.

Solarfun Power Holdings (NASDAQ:SOLF) is the most overbought China solar play at the moment, suggesting time is right for a pullback. Energy prices are coming off latest highs as earnings roll in.

E-House Holdings (NYSE:EJ) is another stock in the danger zone for Monday. The sudden price increase from $13.9 to $15.9 in five days suggests the stock might take a breather rather sooner than later.

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The oversold end of the China stock universe is relatively harmless on Monday morning, as the following chart testifies.

OS_2010712

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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