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Momentum is back for China stocks, Oct. 25

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advance8 October 25, 2011 (Chinavestor) The number of overbought China stocks is certainly on the rise. New stock on the list since yesterday include China Automotive Systems (NASDAQ:CAAS), E-House Holdings (NYSE:EJ) and Silvercorp Metals (NYSE:SVM). The good news is that when markets surge, even overbought stocks tend to go higher. But investors have to be careful going forward for downside risk is on the rise. Despite big time advances on Monday, LDK Solar (NYSE:LDK), New Oriental Education (NYSE:EDU) and Changyou.com Ltd. (NASDAQ:CYOU) are still on the oversold screen. All this means at this point is this: more upside potential.

Back to the overbought screen. China Automotive Systems (NASDAQ:CAAS), a high beta stock, is overbought just like Vimicro Int. (NASDAQ:VIMC) and Chindex International (NASDAQ:CHDX). But these stocks don't have too much trading volume, rendering the overbought indicator less accurate.

E-House Holdings (NYSE:EJ) is looking good today after a sizable advance on Monday. China Vanke (SHE:200002), the largest property developer in China, led the Shanghai Composite Index (SHA:000001) higher after reporting better than expected quarterly results. This bodes well for E-House Holdings (NYSE:EJ) and the rest of the sector. As far as technical indicators go, EJ is not overbought to the extremes suggesting more upside is possible. But Tuesday may be a good day to take profits before the stock falls into a correction phase.

Silvercorp Metals (NYSE:SVM) is another stock that cheered investors on Monday. The stock is trading close to theoretical highs but when market sentiment is strong, SVM has a chance to continue to shine. But downside risk may exceed upside potential sooner than later.

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When markets are on fire, oversold stocks have a chance to jump big time. Chinese solar makers had their best day for weeks on Monday. LDK Solar (NYSE:LDK) advanced double digits in % terms and is ready to do some more. Don't be fooled by the oversold screen: this stock has upside potential!

New Oriental Education (NYSE:EDU) is also a stock on fire. Don't expect this stock to remain on the oversold screen too much longer.

Changyou.com Ltd. (NASDAQ:CYOU) is gaining back lost ground. Sohu.com Inc. (NASDAQ:SOHU) is off the oversold screen and Changyou.com Ltd. (NASDAQ:CYOU) may follow suit soon.

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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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