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Vulnerable overbought China stocks

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warning2 Aug. 5, 2010 (Chinavestor) The eleven percent advance may be too much of a stretch for Perfect World (NASDAQ:PWRD), according to the overbought monitor. Nam Tai Electronics (NYSE:NTE) added another four percent yesterday after a sizable jump on Monday. Again, the stock is in the danger zone. Baidu.com (NASDAQ:BIDU) has enjoyed a lift following robust quarterly earnings - with rising downside potential. General Steel (NYSE:GSI), 51job Inc. (NASDAQ:JOBS) and Shanda Interactive (NASDAQ:SNDA) have all enjoyed the ride this week - but look vulnerable to market correction.

Chinese online game developers and operators have been making up a lot of ground lately, ahead of quarterly earnings. Changyou.com (NASDAQ:CYOU) reported so far and investors liked what they saw. Given that key players of the sector have been underdogs for most of the year, recent rally is well taken. But investors have to consider that Perfect World (NASDAQ:PWRD) has been stretching too far, according to the overbought monitor. The rise in Shanda Interactive (NASDAQ:SNDA) is less dramatic nevertheless is significant and might call for a breather.

Nam Tai Electrocnics (NYSE:NTE) has been on fire since Monay, following a robust second quarter earnings report. But the increase in stock price might be too much, too fast - according to the overbought monitor. 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.

Investors took time to digest superb quarterly report of Baidu.com (NASDAQ:BIDU). The stock barely moved the day following the report but caught fire this week. The stretch is more gradual than most overbought China plays but is calls for attention.

51job Inc. (NASDAQ:JOBS) advanced 17 percent for the last five trading days and is getting overbought. Investors have to exercise caution!

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The oversold end of the China stock universe remains uneventful on Thursday morning.

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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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