October 19, 2010 (Chinavestor) The overbought monitor picked up three stocks trading at extremes: Rino International Corp. (NASDAQ:RINO), Jinpan International Ltd. (NASDAQ:JST) and Ata Inc. (NASDAQ:ATAI). These stocks advanced too much too fast, according to the chart below, and might be up for a technical correction. Other Chinese stocks at extremes include HQ Sustainable Maritime Industries (AMEX:HQS), China Fire & Security Group (NASDAQ:CFSG) and China Housing & Land Development, Inc. (NASDAQ:CHLN). These stocks have approached theoretical highs already, suggesting downside risk exceeds upside potential.
The problem with this second group is that low volume makes the overbought indicator inaccurate. For instance China Fire & Security Group (NASDAQ:CFSG) advanced a modest 12% in the last five trading days yet is trading at extremes. It's because of previous lackluster performance in the past and not because a sudden, significant increase.
Some Chinese stocks have cleared over 12% a day, or advanced 26% in five days - like Rino Intenrtional (NASDAQ:RINO). That's what the overbought monitor is looking for. Jinpan Interntional (NASDAQ:JST) surged 13.72% on Monday, another example of advancing too much, too fast.
Shorts are on the defense at HQ Sustainable Maritime Industries, Inc.(AMEX:HQS) after the stock has advanced over 10% in the past few days. But even this relatively modest gain looks too much for the stock, according to the overbought monitor.
China Housing & Land Development, Inc. (NASDAQ:CHLN) has been experiencing a bumpy road lately. The stock is trading dangerously close to theoretical highs and is susceptible to profit taking.
Ata Inc. (NASDAQ:ATAI) is not investment grade due to its super low volume - so any bump up in price gets the overbought monitor overload.
There is not a single Chinese ADR trading at an extreme oversold position. The oversold end comes to play when the market falls, as may be the case going forward. For now, investrors have to worry about the overbought monitor only.
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.