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Careful with momentum China stocks in October

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warning1 October 13, 2011 (Chinavestor) Chindex International (NASDAQ:CHDX) took the lead on the overbought China stock screen this morning. E-house Holdings (NYSE:EJ) looks very similar to the leader, both stocks have approached theoretical highs. Spreadtrum Communications (NASDAQ:SPRD) is showing strong momentum but Silvercorp Metals (NYSE:SVM) has lost some of its shine. Despite some advances, China Life Insurance (NYSE:LFC) is looking good on the overbought monitor. But not all real estate stocks look good, as is evidenced by Xinyuan Real Estate (NYSE:XIN). The stock is among the 25 most oversold Chinese stocks. China Telecom (NYSE:CHA) is weak from a technical point of view as are some solar stocks like China Sunergy (NASDAQ:CSUN) and Canadian Solar (NASDAQ:CSIQ).

Chinese stocks took advantage from the resurgence of the Dow. The index turned positive for 2011 yesterday, helping a limited number of Chinese stocks breaking above 50-DMA. E-House Holdings (NYSE:EJ) is one of them, a stock that has unusual momentum lately. The good news is that the stock hasn't reached theoretical highs yet. This implies more upside is possible. Nevertheless downside risk is on the rise!

Chindex International (NASDAQ:CHDX) is almost overbought. There is more downside risk than upside potential at this point.

China Life Insurance (NYSE:LFC) is trading above its 50-DMA as well and has a lot more upside left. The stock is still far from theoretical highs and is trading within its trading envelope. For a list of Chinese stocks above 50-DMA, read:  CEO, EJ, LFC, ASIA ... Break Above 50-DMA

Spreadtrum Communications (NASDAQ:SPRD) is another stock of interest. The stock has sound momentum and is not overbought. More upside is possible, should market sentiment remain buoyant.

Silvercorp Metals (NYSE:SVM) has crested in the past three days. With commodity prices falling, there is not much upside for the immediate future.

Stocks with momentum but no market cap/trading volume are less of an interest for investors. For this reason we don't pay too much attention to advances of stocks like Gushan Env. (NYSE:GU) or Gigmedia Ltd. (NASDAQ:GIGM).

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There is not a single classical oversold China stock today. Weakness of Xinyuan Real Estate (NYSE:XIN) is all that interesting in the light of the resurgence of E-House Holdings (NYSE:EJ). We know EJ is in the service industry while XIN is a real estate developer, yet the two depend on the same underling forces.

Chinese telecoms have been defensive stocks lately and missed out on the rally. This is behind the relative poor performance of China Telecom (NYSE:CHA).

Solar stocks have been mixed with Yingli Green Energy (NYSE:YGE) shining but China Sunergy (NASDAQ:CSUN) and Canadian Solar (NASDAQ:CSIQ) hurting. More downside is possible for these latter two.

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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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