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Watch out for overbought China stocks, Feb. 3

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warning3 February 3, 2011 (Chinavestor) The overbought end of the China stock universe is a full house. Aluminum Corp. of China (NYSE:ACH) may be trading the closest to theoretical highs but it's Focus Media Holdings (NASDAQ:FMCN), Sohu.com Inc. (NASDAQ:SOHU), Jinpan International Limited (NASDAQ:JST), Baidu.com Inc. (NASDAQ:BIDU) and Spreadtrum Communications, Inc (NASDAQ:SPRD) that looks most vulnerable, according to the overbought chart.

Aluminum Corp. of China (NYSE:ACH) is trading way above its trading range and has approached theoretical highs. The good news is that the company has advanced in both key Asian markets, suggesting there is a broad support for the stock at the moment.

Focus Media Holdings (NASDAQ:FMCN) is just as much overbought as ACH except that the company doesn't have the fundamental backing  what the Chinese aluminum maker has.

Sohu.com Inc. (NASDAQ:SOHU) rose for the third day in a row after reporting sound financials. But the advance looks too much, too fast and a pullback is the most likely scenario at this point.

Jinpan International Limited (NASDAQ:JST) has yet to report earnings and thus current jump looks excessive. Downside risk now exceeds upside potential for the stock.

Baidu.com Inc. (NASDAQ:BIDU) has been and remains a wild horse. Despite a significant rally in February, the stock may continue to climb higher. The company has one of the best fundamentals of any Chinese companies, a factor that may be able to keep it go higher.

Spreadtrum Communications, Inc (NASDAQ:SPRD) is trading way above its trading range and looks overstretched at the moment. Investors have to be defensive here.

OB_201123

There hasn't been much change on the oversold end of the oversold China stock universe. China Fire & Security (NASDAQ:CFSG) remains the most oversold one but again, there isn't much to read from the oversold screen for 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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