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Overbought China stocks to watch on Oct. 22

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worry_1 October 22, 2010 (Chinavestor) A volatile session rattled the nerves of China stock investors on Thursday. China Life Insurance (NYSE:LFC) was able to hang on to previous gains remaining in the danger zone according to the overbought chart. China Yuchai International (NYSE:CYD) surged 11.51% but is trading dangerously close to theoretical highs. CNinsure Inc. (NASDAQ:CISG) is looking similar to CYD from a technical point of view with increasing downside risk. The overbought indicator picked up Jinpan International (NASDAQ:JST) and Qiao Xing Universal Resources, Inc (NASDAQ:XING), stocks that experienced two extremely volatile trading sessions. Investors have to exercise caution when dealing with both stocks.

China Life Insurance (NYSE:LFC) surged from $60 earlier in October to over $70 as outlook for the Shanghai Composite Index (SHA:000001) improved. But upside looks limited for the short term according to the overbought chart below.

Latest surge of smaller cap China Yuchai International (NYSE:CYD) and CNinsure Inc. (NASDAQ:CISG) pushed both stocks into the danger zone. Both ADRs are trading way above their trading envelope, approaching theoretical highs. This in turn suggests downside risk exceeds upside potential.

Another overbought stock pair is Jinpan International (NASDAQ:JST) and Qiao Xing Universal Resources, Inc (NASDAQ:XING). While these stocks haven't reached theoretical highs yet, the sudden increase this week alone suggests upside for the short term is limited.

OB_20101022

The oversold end of the China stock universe is missing action but that will not last for too long. The sudden loss of GigaMedia Ltd. (NASDAQ:GIGM) calls for a correction though more downside is possible, according to the oversold chart below.

OS_20101022

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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