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Overbought monitor: more upside for China stocks

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advance7 Aug. 2, 2010 (Chinavestor) Despite the surge in July upside is not limited for momentum China stocks, says the overbought monitor before the first trading day in August. The9 Ltd. (NASDAQ:NCTY) is the only stock in the danger zone from a technical point of view. Guangshen Rail (NYSE:GSH) and Chindex International (NASDAQ:CHDX) look similar on the overbought chart with more potential upside. 3SBio (NASDAQ:SSRX), Sina  Corp. (NASDAQ:SINA) and Sohu.com (NASDAQ:SOHU) haven't reached theoretical highs yet, leaving more room to the upside. China Eastern Airlines (NYSE:CEA) is another candidate for more gains on Monday, according to the chart below.

China Infrastructure Development (NASDAQ:CIIC) and Vimicro International (NASDAQ:VIMC) might pop after suffering unusual blows last week. CDC Corp. (NASDAQ:CHINA) has more downside risk but Melco Crown Entertainment (NASDAQ:MPEL) might pleasantly surprise investors after tumbling lately - according to the oversold monitor.

Chinese online game developers and operators had a strong month in July with The9 Ltd. (NASDAQ:NCTY) taking the lead. With a 30 percent increase in July, downside risk now exceeds upside potential for this small player, suggests the overbought monitor.

Large cap Guangshen Rail (NYSE:GSH) has been rising on the back of infrastructure development in China. The government unveiled plans to build a record number of high speed trains in 2010-2015, some of them built and operated by GSH. Despite recent surge, more upside is possible for the company.

Chindex International (NASDAQ:CHDX) is driven by momentum and is much more volatile than Guangshen Rail (NYSE:GSH), suggesting investors will have to exercise caution with this China stock.

Sohu.com (NASDAQ:SOHU) reported solid quarterly earnings last week and the market is expecting a similar one from Sina Corp. (NASDAQ:SINA). Sohu reported a "double play" beating both revenue and earnings estimates.

China Eastern Airlines (NYSE:CEA) was one of the best performing stock in the Growth portfolio in July, but more upside is possible, according to the overbought chart below.

OB_201082

The tide may be turning for China Infrastructure Development (NASDAQ:CIIC), suggests the oversold monitor. Vimicro International (NASDAQ:VIMC) looks similar to CIIC from a technical point of view but fundamentals back CIIC in addition to technicals. CDC Corp. (NASDAQ:CHINA) experienced a significant drop last week but is still trading within normal trading range. This suggest more downside is possible. Melco Crown Entertainment (NASDAQ:MPEL) is just a  volatile stock that might pop any minute, according to the oversold monitor below.

OS_201082

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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