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Careful with overbought China stocks on Sept. 21

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warning3 September 21, 2010 (Chinavestor) A strong day like yesterday makes a difference for volatile and momentum China stocks. The number of overbought China stocks is on the rise with some of them trading at extremes! New Oriental Education (NYSE:EDU) is clearly overbought but investors will have to pay close attention to Sina Corp. (NASDAQ:SINA) and China Peroleum & Chemical Corp. (NYSE:SNP) as well. Smaller cap ChinaCast Education (NASDAQ:CAST) or E-House Holdings (NYSE:EJ) are also getting expensive, at least for the short term. UTStarcom (NASDAQ:UTSI) is screaming off the chart...

New Oriental Education (NYSE:EDU) stepped above its theoretical highs, flirting with the $110 level a new all time high. But the advance will have to slow down and a temporary pullback looks inevitable.

Sina Corp. (NASDAQ:SINA) is trading at theoretical highs, suggesting the stock will have to take a breather. There is nothing wrong with SINA from a fundamental point of view, it's just that a break will have to come before resuming the climb.

Asia's largest refiner, China Petroleum & Chemical Corp. (NYSE:SNP), is overbought and is ready to take a break. Don't expect much upside for this large cap China play for the short term.

ChinaCast Education Corp. (NASDAQ:CAST) has more upside left despite latest surge. The stock hasn't reached theoretical highs yet. Melco Crown Entertainment (NASDAQ:MPEL() and E-House Holdings (NYSE:EJ) looks similar to CAST from a technical point of view. The next few days will be critical determining outlook for next week.

UTStartcom (NASDAQ:UTSI) rose too much, too fast and is ready to slow down, according to the overbought chart below.

OB_2010921

There is not much action on the oversold end of the China stock universe this morning as the following chart testifies.

OS_2010921

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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