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Moment of truth for overbought China stocks

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light_2 August 24, 2010 (Chinavestor) Overbought China stocks are most vulnerable when market sentiment turns sour. But those that can hang on to previous gains have a chance to rally real strong once bulls get back to the driver seat. Looking at the overbought screen today, Perfect World (NASDAQ:PWRD) and ChinaEdu Corporation (NASDAQ:CEDU) look to be the most vulnerable China stock for the day. But make no mistake, small cap stocks won't be able to fight the market, suggesting short term gains are gone for China TechFaith Wireless (NASDAQ:CNTF) and Rino International (NASDAQ:RINO) as well. China Digital TV Holdings (NYSE:STV) is trading well above its trading range, suggesting a sizable pullback is possible.

Perfect World (NASDAQ:PWRD) and NetEase.com (NASDAQ:NTES) have been the best online game developer and operator stocks lately - but might pull back the fastest as a result.

ChinaEdu Corporation (NASDAQ:CEDU) is trading at extremes and is vulnerable on Tuesday.

China TechFaith Wireless (NASDAQ:CNTF) and Rino International (NASDAQ:RINO) have already hit a plateau lately but now the question is if they can hang on to previous gains. China Digital TV Holdings (NYSE:STV) looks just as vulnerable for the day or for the rest of the week, in fact.

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Oversold stocks come handy during bull markets, so for today the indicator is just good for food for thought. Investors should keep their eye on stock such as volatile WuXi Pharmatech (NYSE:WX) or CDC Corp. (NASDAQ:CHINA), but larger cap China Life Insurance (NYSE:LFC) might come handy later the week as well. 

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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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