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Careful with overbought China stocks

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WallStreet July 23, 2010 (Chinavestor) A week of optimism sent some Chinese stocks over the board, according to the overbought monitor. Investors have to be careful with Shanda Games (NASDAQ:GAME), Sinopec Shanghai Petrochemical (NYSE:SHI), NetEase.com (NASDAQ:NTES), E-House Holdings (NASDAQ:EJ), Sina Corp. (NASDAQ:SINA) and Shina Sunergy (NASDAQ:CSUN). Large cap China Eastern Airlines (NYSE:CEA) is in the danger zone as well.

Shanda Games (NASDAQ:GAME), the online game arm of Shanda Interactive ( NASDAAQ:SNDA), has been creeping higher into a point where it is now overbought. Downside risk exceeds upside potential at this point.

Sinopec Shanghai Petrochemical (NYSE:SHI) advanced in Hong Kong earlier the day suggesting more upside is on the way for the stock, but it needs to take a breather soon, according to the overbought chart below.

The same is true for NetEase.com Inc. (NASDAQ:NTES) and E-House Holdings (NYSE:EJ). Both stocks have advanced significantly over the week and while more upside is possible, based on fundamentals, technicals call for a slower pace of appreciation.

Sina Corp. (NASDAQ:SINA) has been plateauing, just as predicted in earlier overbought reports.

China Sunergy (NASDAQ:CSUN) is one of numerous Chinese solar stocks that have enjoyed a ride ahead of solar earnings. Trina Solar (NYSE:TSL), Suntech Power (NYSE:STP) and Yingli green Energy (NYSE:YGE) has been slowing down lately, a path CSUN is expected to follow.

China Eastern Airline (NYSE:CEA) is China's second largest carrier, a large cap stock that don't get overbought to the extreme. The stock fell in Hong Kong earlier today, suggesting a similar move on the NYSE for Friday.

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The oversold end of the China stock universe is relaively uneventful at this point. No China ADR is trading at extremes, accoring to the oversold indicator.

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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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