August 13, 2010 (Chinavestor) There is not a single overbought China ADR at the moment but the oversold end of the China stock universe is full of action. Mindray Medical (NYSE:MR) is sticking out with the most significant fall. It is difficult to single out any more stock, Tongjitang Chinese Medicines (NYSE:TCM) or Giant Interactive (NYSE:GA) is just as oversold as China Nepstar Chain Drugstore (NYSE:NPD) or CDC Corp. (NASDAQ:CHINA).
The difficulty is that most of the fall is a result of disappointing earnings, a strong fundamental force. When fundamentals are in the driver seat, technicals are only secondary. Yet the dramatic fall of Mindray Medical (NYSE:MR) is striking and is calling for a correction. A sharp decline from $33 to $26 in just four days suggests to a technician that a security is oversold. 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.
The other type of oversold equities are those that are trading well below their trading envelope. Tongjitang Chinese Medicines (NYSE:TCM) or Giant Interactive (NYSE:GA) are trading below their trading envelope and are approaching theoretical lows. The same is true to China Nepstar Chain Drugstore (NYSE:NPD) or CDC Corp. (NASDAQ:CHINA), suggesting these Chinese stocks are oversold.
AgFeed Industries (NASDAQ:FEED) hasn't reached theoretical lows yet, suggesting downside risk remains high.
The overbought end of the China stock universe is in sharp contrast to the oversold one.It is hard enough to find a stock that has actually advanced for the week.
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.