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Can large caps catch up momentum?

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question_2 October 24, 2011 (Chinavestor) Small cap China stocks dominate the overbought list today. Vimicro Int. (NASAQ:VIMC) and Chindex Int. (NASDAQ:CHDX) are overbought to the extremes and most notable movers are all smaller stocks. Vanceinfo Technologies (NYSE:VIT), Harbin Electric (NASDAQ:HRBN) and Spreadtrum Communications (NASDAQ:SPRD) are mid-cap stocks that portray unusual move on the screen. But what about larger stocks like Baidu.com Inc. (NASDA:BIDU) or Sohu.com (NASDAQ:SOHU)? Apparently they show up on the oversold screen. And while not oversold to the extremes, they present opportunity for bottom fishers, just like Ctrip.com International (NASDAQ:CTRP).

Some investors believe overbought stocks are ripe for profit taking and thus further price appreciation is unlikely. But when small cap stocks dominate the overbought screen, technical analysts know that they not necessarily represent a true picture. The fact of the matter is that small caps with low volume are hard to predict using technical indicators.

Spreadtrum Communications (NASDAQ:SPRD) is a stock with sufficient volume to look at though. The stock looks very good, has upside potential left and is coming with a some momentum. but Vanceinfo Technologies (NYSE:VIT) is a wild horse with no indication where the stock is going to go from here.

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Chinese technology stocks fell hard last week. Baidu.com Inc. (NASDA:BIDU) is far from oversold but is certainly hurt. more downside is possible albeit chances are that it will surge should market sentiment improve. Sohu.com (NASDAQ:SOHU) and Changyou.com Ltd. (NASDAQ:CYOU) present huge upside potential as well. Both stocks are closer to theoretical lows than highs and are of high beta/volatile stocks.

Another technology stock of interest is Ctrip.com International (NASDAQ:CTRP). The stock is not oversold and is just trading below its trading envelope. Upside potential is large and with earnings season approaching, investors may get pleasantly surprised.

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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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