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Momentum lifts China stocks to extremes on September 3

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risk_1 September 3, 2010 (Chinavestor) Momentum is back for China stocks says the overbought monitor. While there is not a single oversold China ADR to speak of, a large number of Chinese stocks have reached theoretical highs. When the market is on fire, as is this morning following the better-than-expected jobs report, momentum stocks do fine. But investors better pay attention to those that are overstretched for they fall the hardest when momentum dries up.

That said, China Medical Technology (NASDAQ:CMED), Spreadtrum Communications (NASDAQ:SPRD), China TechFaith Wireless (NASDAQ:CNTF) and Acorn International (NYSE:ATV) look to be the most vulnerable China stocks at the moment. While there is more upside for these small cap plays, downside risk is certainly high for them at the moment.

Larger cap China Unicom (NYSE:CHU) and Huaneng Power (NYSE:HNP) are expected to level off soon, for these NYSE-HKEx cross-listed blue chips don't get too oversold that often. E-House Holdings (NYSE:EJ) is another stock of concern given the solf outlook for the property market in China.

Details: 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. This is multiplied whne it comes to small cap NASDAQ listed China plays. For this reason China Medical Technology (NASDAQ:CMED) and Spreadtrum Communications (NASDAQ:SPRD) are definitely stocks of concern. China TechFaith Wireless (NASDAQ:CNTF) and Acorn International (NYSE:ATV) have risen too much, too fast - according to the overbought screen below. Again, momentum may carry these stocks higher but downside risk is exceeding upside potential, based on the chart below.

Huaneng Power international (NYSE:HNP) is China's largest independent power producer and as such is much less volatile than any of those NASDAQ names mentioned above. It takes a whole lot more money to move HNP than China Medical Tenchology (NASDAQ:CMED) or China TechFaith Wireless (NASDAQ:CNTF), let's say. This in turn suggests despite recent surge, downside risk is not that great for Huaneng Power (NYSE:HNP) at the moment.

The same is true for China Unicom (NYSE:CHU), China's second largest mobile carrier. Beta is higher for CHU than for HNP, suggesting volatility is greater for the telecom company, but again NYSE listed large cap Chinese stocks are much more resilient to market downturns than their NASDAQ listed counterparts.

E-House Holdings (NYSE:EJ) has been highly volatile in the past and investors have to wonder how long current resurgence can propel the stock. Property related stock fell in Shanghai on Friday while autos rose, following news that property prices may fall as of September while car sales rose three times as fast in August than in July. Investors have to consider ramifications of such events in Shanghai this morning whne it comes to EJ and other property stocks.

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There is not a single China ADR trading at extremes on the oversold end of the universe. There is enough to worry about on the overbought screen this morning.

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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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