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Are shorts behind volatile China stocks?

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disappopint September 2, 2011 (Chinavestor) Despite an over 100 points drop of the DJIA on Thursday, most of the action took place on the overbought screen that day. There is not much to see on the oversold screen except for the position of CNinsure (NASDAQ:CISG). Spreadtrum Communications (NASDAQ:SPRD) rose 8.5% and is catching up with other overbought China stocks. Large cap stocks lacked momentum except for China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU). Small cap stocks pushing closer to extremes included as Zhongpin Inc. (NASDAQ:HOGS), China CD Plastics (NASDAQ:CXDC), Sutor Technologies (NASDAQ:SUTR), Harbin Electric (NASDAQ:HRBN), Xinyuan Real Estate (NYSE:XIN) and Telestone Technologies (NASDAQ:TSTC). Large cap China stocks have been missing out lately according to the overbought monitor. China Unicom (NYSE:CHU) and China Mobile (NYSE:CHL) have accumulated some momentum but that proved to be fragile on Thursday when the DJIA fell over 100 points.

But small caps are different. Risk awareness is taking a back seat for China stock investors after some reverse merger Chinese companies reported sound earnings. China CD Plastics (NASDAQ:CXDC) not only reported a record quarter but listed Morgan Stanley as a main investor after to a $100 million convertible bond sale. General Steel (NYSE:GSI), another reverse merger China play, more than doubled its sales from last year, underscoring that not every reverse merger stock is garbage. Telestone Technologies (NASDAQ:TSTC), a reverse merger China play, has come off from as low as $4.5 two weeks ago to $6.20 by Friday.

Spreadtrum Communications (NASDAQ:SPRD) has dangerously approached theoretical high levels with high volume, a mixed signal for Friday. While more upside looks possible, downside risk is certainly on the rise before the long weekend. Some argue that most shorts have covered, which caused the pps going up. Most of them hold short positions to expect another short attacks from Muddy Waters. But obviously they don't want to wait anymore since the pps was up so much. However investors shouldn't be surprised that another short attack is really coming after the short interests drop. Nobody want to publish a short report when other people has a huge short interest. A short attack will work perfectly after the pps was up 3 times.

The overbought indicator picked up the unusual move of Zhongpin Inc. (NASDAQ:HOGS). The stock advanced 14% since last Friday but has more upside potential left.

Sutor Technology (NASDAQ:SUTR) surged over 30% in three days. The good news is that despite the unusual move, the stock isn't overbought yet!

Momentum is building for Xinyuan Real Estate (NYSE:XIN) a stock that advanced eight times out of the past ten trading days. The good news is that the advance has been gradual, leaving plenty of room to additional upside.

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The oversold monitor is missing action at this time. CNinsure (NASDAQ:CISG) fell 20% since last Friday but hasn't hot bottom yet, according to the oversold indicator.

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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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