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Overbought China stocks in danger, September 27

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bear_bull September 27, 2010 (Chinavestor) Last Friday's rally ended up pushing a good number of China stocks over the edge, according to the overbought monitor. Guangshen Rail (NYSE:GSH), a large cap NYSE listing, is on the top of the overbought China stock list. Volatile Gushan Environmental Energy (NYSE:GU) not only moved up too much too fast but reached theoretical highs as well. Double red flag for this bio-diesel producer. Investors took a liking at large, NASDAQ listed liquid Ctrip.com (NASDAQ:CTRP) and Sohu.com (NASDAQ:SOHU) as well. Search engine giant Baidu.com (NASDAQ:BIDU) stepped above its trading range and gained tremendous momentum last week. Vanceinfo Technologies (NYSE:VIT) has been loosing momentum while VisionChina Media (NASDAQ:VISN) has just approached theoretical highs lately. New Oriental Education & Technology (NYSE:EDU) has more downside, according to the oversold monitor.

The overbought analysis is not to say that we turn bearish on a stock. Far from it. It merely infers that the stock has risen too far too fast and might be due for a pullback.

Looking at Guangshen Rail (NYSE:GSH) as an example; current stock  price is considered too high and susceptible to a decline. The same is true for Gushan Environmental Energy (NYSE:GU). Both stocks are trading out of their trading envelope and are approaching theoretical highs. A sharp advance from $.60 to $.84 in one week might lead a technician to believe that Gushan Environmental Energy (NYSE:GU) is overbought.

After alleged accounting problems with smaller cap Chinese stocks, investors found safety in large cap, liquid stocks. This rotation is partially responsible for the superb performance of Ctrip.com International(NASDAQ:CTRP) for example. Internet household names such as Sohu.com (NASDAQ:SOHU) and Sina Corp. (NASDAQ:SINA) benefited as well. Strong money flows helped Baidu.com (NASDAQ:BIDU) record a 14 percent gain for the week. But there is difference between these liquid NASDAQ names and GU. While they may look close to each other on the overbought monitor, liquid names are less susceptible to a correction despite a similar reading on the chart below.

Vanceinfo Technologies (NYSE:VIT) is close to theoretical highs and is in the danger zone. The same is true for VisionChina Media (NASDAQ:VISN) - both stocks are in a different league from Sohu.com (NASDAQ:SOHU) or Baidu.com (NASDAQ:BIDU). Investors will have to exercise caution with VisionChina Media (NASDAQ:VISN) as a result.

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China Integrated Energy (NASDAQ:CBEH) has bottomed out and might get a lift from the overall strength in Gushan Environmental Energy (NYSE:GU). Both companies are engaged in the bio-diesel business with certain differences.

New Oriental & Education Tech (NYSE:EDU) fell hard but is trading in the middle of its trading envelope. This suggests the shock was big but more downside is possible.

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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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