November 2, 2011 (Chinavestor) Chinese small caps continue to dominate the overbought screen this morning. Lack of momentum in the telecom sector is evidenced by China Telecom (NYSE:CHA) and China Mobile (NYSE:CHL), both stocks from the oversold screen. Sina Corp. (NASDAQ:SINA) is another stock on the oversold screen with significant upside potential.
China BAK Battery (NASDAQ:CBAK) surprised markets on Tuesday with a 18.5% surge in the late afternoon. That jump sent the stock to extremes. But accuracy of technical indicators is limited when it comes to small cap, low volume stocks.
For this reason it is hard to say that upside is limited for Linktone Ltd. (NASDAQ:LTON) for instance. Even a tiny $.10 advance in low volume would keep it at overbought extremes. Is there a chance of that? Certainly.
When market sentiment is strong, oversold stocks come to play. Chinese telecom stocks have served as safe heavens and as such are limited in the upside when markets recover. This bodes ill for China Telecom (NYSE:CHA) and China mobile (NYSE:CHL) at the moment.
But Sina Corp. (NASDAQ:SINA) is a stock to watch when markets recover. The stock lost 11% in the last three days and while is not oversold to the extremes, has volume and market cap to take advantage of a market resurgence.
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.