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China stocks pop but stay alert says the overbought monitor

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advance3 October 14, 2010 (Chinavestor) The number of Chinese stocks trading at extremes is on the rise lately with new names popping up randomly. China Housing & Land Development, Inc (NASDAQ:CHLN) is new on the list along with Wonder Auto Technologies (NASDAQ:WATG). Upside for large cap China Petroleum & Chemical Corp. (NYSE:SNP) looks limited from here on according to the overbought chart below.

 

 

Investors have to keep in mind that overbought is not the same as bearish. But when a stock reached theoretical highs, expectations are that the stock is going to take a break before resuming any rally. For this reason short-term upside potential looks minimal for food stocks such as AgFeed Industries (NASDAQ:FEED), Origin Agritech (NASDAQ:SEED) and Agria Corp. (NYSE:GEO).

Changyou.com (NASDAQ:CYOU) on the overbought list is a reminder that the online game sector is back at play as well. While not on the list yet, Shanda Games (NASDAQ:GAME) advanced significantly but more is on the way, according to the overbought indicator.

A red hot real estate market in China on Wednesday helped push China Housing & Land Development, Inc (NASDAQ:CHLN) to the top of the overbought China stock list. It certainly helped Wonder Auto Technologies (NASDAQ:WATG) to surge 15 percent just in three days.

But large cap stocks, such as China Petroleum & Chemical Corp. (NYSE:SNP), don't get usually overbought all the way to theoretical highs. For this reason it appears that upside is limited for Sinopec (NYSE:SNP).

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The oversold end of the China stock universe is without action; the number of China stocks on the decline is minimal at this point. The danger is with overbought Chinese stocks today.

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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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