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China stock extremes to watch on Sept. 30

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watch_out September 30, 2010 (Chinavestor) Just a mid size correction in the markets would be perilous for a good number of overbought Chinese stocks. ShengdaTech Inc. (NASDAQ:SDTH) is just as overbought as Yanzhou Coal (NYSE:YZC), the third largest Chinese coal miner. But Canadian Solar (NASDAQ:CSIQ) and Yingli Green Energy (NYSE:YGE) advanced too fast, too much as well, according to the overbought indicator below. The presence of Trina Solar (NYSE:TSL) and Solarfun Power (NASDAQ:SOLF) among the 25 most overbought Chinese stocks is to testifiy that the solar sector is getting overheated. AirMedia Group (NASDAQ:AMCN) and China Petroleum & Chemical Corp. (NYSE:SNP) is looking vulnerable as well.

Investors have to remember that stocks become overbought 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.

With that said, current stretch from $4.38 to $5.04 in just one week suggests ShengdaTech Inc. (NASDAQ:SDTH) is in danger.

A pullback is just as imminent for Yanzhou Coal Mining (NYSE:YZC), a large cap NYSE-HKEx cross listed ADR. While Wednesday's advance of 3.30 percent was foretold by a similar advance in Hong Kong earlier the day, the most likely scenario for YZC is heading south.

The sudden advance in Canadian Solar (NASDAQ:CSIQ) is calling for a correction. The stock is trading at theoretical highs and a pullback looks imminent. Yingli Green Energy (NYSE:YGE) is less overbought but is considered trading at extremes. A pullback for the sector will take a toll on YGE as well. Larger cap Trina Solar (NYSE:TSL) is looking better from a technical point of view, a correction for the sector won't be as severe as for Canadian Solar (NASDAQ:CSIQ) or Yingli Green Energy (NYSE:YGE). Solaarfun Power Holdings (NASDAQ:SOLF) is another Chinese solar play that enjoyed the ride on the back of the strength of the sector. More upside is possible for this stock, according to the overbought monitor.

Going down the list, AirMedia Grpoup (NASDAQ:AMCN) stikes investors with a 35 percent advance in just one week. The stock topped the surge with a 8.58 percent advance on Wednesday, but investors better take profits before it's too late. The stock has advanced too fast, too much, according to the chart below.

Large cap China Petroleum & Chemical Corp. (NYSE:SNP) is considered overbought as well. Asia' largest refiner by volume is too large company to reach all the way to theoretical highs. Yet current reading suggest downside risk exceeds upside potential for the stock.

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New Oriental Education (NYSE:EDU) fell hard following pre-announcement of upcoming resluts. But the stock advanced two days in row, Tuesday and Wednesday, suggesting downside is limited from here.

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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