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Oversold stocks walk in tight rope

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banace_4 December 14, 2011 (Chinavestor) ChinaEdu Corp. (NASDAQ:CEDU) pulled back on Tuesday after reaching extreme overbought position. Still, downside risk exceeds upside potential for the stock. Chinese solar stocks pulled back as well as outlook in Europe, the largest export market, worsened. These developments gave way to the oversold end of the China stock universe. E-House Holdings (NYSE:EJ) is trading closest to theoretical lows but is not considered oversold yet. Sina Corp. (NASDAQ:SINA), China Telecom (NYSE:CHA), Silvercorp Metals (NYSE:SVM) and Ctrip.com Int. (NASDAQ:CTRP) are stocks with sufficient trading volume to make a difference.

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First and foremost, there are no oversold China stock extremes this morning. Still, the sharp decline of E-House Holdings (NYSE:EJ) is worth paying attention to. The stock slid almost 40% in the last three and a half weeks as China's housing market cooled off. The bad news is that despite the slide, more downside looks possible.

Things are just as sour for Sina Corp. (NASDAQ:SINA). The stock lost 50% of its value in three months and investors want to know where is the bottom. Unfortunately it's still too early to tell if current stock price can hold.

China Telecom (NYSE:CHA) is trading just as close to theoretical lows as Sina Corp. (NASDAQ:SINA) for example but there is a big difference. China Telecom (NYSE:CHA) has been trading in a much narrower range and is still within its trading envelope - or just slightly below it.

Resource stocks remain volatile and is hurting Silvercorp Metals (NYSE:SVM) right now. But investors know that high beta stocks, like SVM or Ctrip.com Int. (NASDAQ:CTRP) come handy when the market bounces back strong. Keep your eyes open investor for a possible bounce back.

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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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