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China stock extremes: overbought list on September 23

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watch_out September 23, 2010 (Chinavestor) While the DJIA was looking for a reason to climb, smaller cap China stocks did it anyway. But the latest surge is about to slow down for China Nepstar Chain Drugstore (NYSE:NPD). The sudden jump in China Precision Steel, Inc. (NASDAQ:CPSL) sets the alarm off but the steady advance in China Real Estate Information Corporation (NASDAQ:CRIC) is just as dangerous, according to the overbought chart below. Momentum stocks trading less extreme include Sinopec (NYSE:SNP), E-House Holdings (NYSE:EJ), New Oriental Education (NYSE:EDU) and Longtop Financial Technologies (NYSE:LFT).

The rally has started to eclipse for Sohu.com (NASDAQ:SOHU), Melco Crown Entertainment (NASDAQ:MPEL) and for Rene Sola Ltd. (NYSE:SOL).

Don't let it fool you that China Nepstar Chain Drgustore (NYSE:NPD) is trading the closest to theoretical highs at this point. A relatively modest increase for the week was too much for the overbought monitor - but the indicator is right in picking up a buy signal for a stock that has been crushed. Trading envelope is close to theoretical highs, suggesting the stock has been experiencing a serious sell-off in the past. Latest advance is just highly unusual... but not a signal for more buying.

By definition, a sharp advance from $1.52 to $1.79 in just one day might lead a technician to believe that a security is overbought. China Precision Steel, Inc. (NASDAQ:CPSL) did just that. A relatively large volume, ten times the average, is a positive sign, but the sudden jump looks just too much, too fast; according to the overbought indicator below.

China Real Estate Information Corporation (NASDAQ:CRIC) has advanced 9 days in a row! No wonder the overbought monitor suggests the rally will have to come to an end. While more upside is possible, the stock is going to take a breather SOON.

Sinopec (NYSE:SNP), Asia's largest refiner by volume, was trading water on Wednesday, just as predicted yesterday morning. Large cap NYSE listed behemoths, like SNP, don't get to be overbought to the extremes. Current reading of the chart suggests downside risk exceeds upside potential.

E-House Holdings (NYSE:EJ) looks similar to Sinopec (NYSE:SNP) from a technical point of view, but that's just part of the whole story. E-House Holdings (NYSE:EJ) is a much smaller stock that is explosive and as such current technical reading is not so troublesome. A good market day may be able to keep EJ rising...

New Oriental Education (NYSE:EDU) is the largest in its field and has very solid fundamentals. But current price of $111.88 is all time high and investors wonder where the ceiling might just be.

Longtop Financial Technologies (NYSE:LFT) has just stepped out of its trading range, suggesting more upside is possible. What gets dangerous is Melco Crown Entertainment (NASDAQ:MPEL) or Sohu.com (NASDAQ:SOHU) from a technical point of view: both stocks have been trading above their trading envelope and have been closing on theoretical highs... Upside risk exceeds downside potential, according to the overbought chart above.  Rene Sola Ltd. (NYSE:SOL) is very similar to Sohu.com (NASDAQ:SOHU) from a technical point of view. Remember Trina Solar (NYSE:TSL) had an excellent run from $18 to $28 in two months but has been hitting resistance. SOL might just do the same...

Despite a sizeable advannce of 14.5 percent jump on Wednesaday, Origin Agritech (NASDAQ:SEED) may have more upside, according to the chart below.

OB_2010923

The oversold end of the China stock universe remains uneventful. China Integrated Energy (NASDAQ:CBEH) is nearing the bottom.

OS_2010923

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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