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Food for thought: oversold stocks

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think_1 May 23, 2011 (Chinavestor) The DJIA falling for three straight weeks left a mark on Chinese stocks. There are no overbought Chinese ADR and it's even hard to find stocks with momentum. Small cap CNinsure Inc. (NASDAQ:CISG), eLong Inc. (NASDAQ:LONG) and ATA Inc. (NASDAQ:ATAI) are trading out of their trading ranges - but that's due to a stock specific news not to market sentiment.

To find stock extremes, investors have to visit the oversold end of the China stock universe. Chinese solar stocks fell hard after two prominent companies reported disappointing earnings last week. Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) are all oversold after failing to impress investors. The presence of ReneSola Ltd. (NYSE:SOL), JA Solar (NASDAQ:JASO) and JinkoSolar Holdings (NYSE:JKS) among the most oversold Chinese stocks ia a testimony that the sector is hurt substantially. Stocks in oversold position include China Yuchai International Limited (NYSE:CYD) and Cogo Group (NASDAQ:COGO) and China Housing & Land Development, Inc. (NASDAQ:CHLN) has hit bottom, according to the oversold chart.

Back to the overbought screen. WuXi Pharmatech (NYSE:WX) is trading closest to theoretical highs but the stock is all but overbought. CNinsure Inc. (NASDAQ:CISG) has unusual momentum - but that's due to the news that it may go private. That suggests no more upside is on the road.

Same is true for eLong Inc. (NASDAQ:LONG), a company that received strategical investment from Tencent Holdings (HKG:0700) and Expedia.com Inc. (NASDAQ:EXPE). The news bumped up the stock big time but most of the gains have already been incorporated into its stock price.

ATA Inc. (NASDAQ:ATAI) is a low volume, small cap stock that goofs up the overbought monitor. Theere is not much to read for this China play from any technical indicator, due to its low volume.

OB_2011523

While there is not much to see on the overbought monitor, the oversold end of the China stock list is full of action. Yingli Green Energy (NYSE:YGE) is trading closest to theoretical lows after a 9.14% dive following 2011 Q1 report. Another oversold China stock is Trina Solar (NYSE:TSL), a company that reported weak revenue and earnings growth last week. The problem for these stocks is that when fundamentals are not right, technical reading doesn't guarantee a bounce back.

The problem is not limited to just those companies that report. LDK Solar (NYSE:LDK), ReneSola Ltd. (NYSE:SOL), JA Solar (NASDAQ:JASO) and JinkoSolar Holdings (NYSE:JKS)are also among the most oversold Chinese stocks, highlighting the fundamental weakness of the sector.

China Housing & Land Development, Inc. (NASDAQ:CHLN) is the second most oversold China play at the moment. Technical indicator suggests the stock hit bottom with not much short term downside risk.

The resignation of a director at China Yuchai International Limited (NYSE:CYD) sent its stock plummeting. The 14% dive looks excessive on the oversold monitor, giving some food for thought for day traders.

OS_2011523

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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