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Vulnerable small caps, defensive telecoms

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banace_4 October 18, 2011 (Chinavestor) There isn't much change on the overbought end of the China stock universe. Small caps continue to dominate the screen with few exceptions. Shanda Interactive (NASDAQ:SNDA) surged on Monday following news that it will go private. And while most small caps held on relatively well on Monday, Tuesday may start hurting them. Stocks in a vulnerable position include Zhongpin Inc. (NASDAQ:HOGS), Harbin Electric (NASDAQ:HRBN), and GigaMedia Ltd. (NASDAQ:GIGM).

Noah Education (NYSE:NED) is on top of the most oversold China stock list. But that may change as strong earnings from New Oriental Education (NYSE:EDU) might lift the sector. Chinese solar stocks fell as is evidenced by China Sunergy (NASDAQ:CSUN) and Canadian Solar (NASDAQ:CSIQ). None of these solar makers are oversold to the extremes, more downside is possible. China Telecom (NYSE:CHA) and China Mobile (NYSE:CHL) are not oversold just have little momentum. But these defensive plays may come handy when markets fall apart.

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Noah Education (NYSE:NED) is trading closest to theoretical lows but is far from bottoming out. Industry leader New Oriental Education (NYSE:EDU) may come to the rescue here for the company just reported very strong earning.

European debt crisis hurt export outlook of Chinese solar makers. We have China Sunergy (NASDAQ:CSUN) and Canadian Solar (NASDAQ:CSIQ) on the oversold screen but the list may grow as we go along the week. But investors better keep a close eye on the sector for these stocks look cheap on valuation.

China Telecom (NYSE:CHA) was the best performing component of the Hang Seng Index (INDEXHANGSENG:.HSI) on Tuesday, lifting outlook for this stock before the NYSE open. China Mobile (NYSE:CHL) fell relatively small in Hong Kong as defensive stocks come to play during volatile markets.

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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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