Experience has taught us that when market sentiment is strong, overbought stocks might be able to hang on to previous gains. While this bodes well for China Precision Steel (NASDAQ:CPSL), Cogo Group (NASDAQ:COGO) and China Nepstar ADS (NASDAQ:NPD) for Tuesday, investors have to exercise caution with these stocks going forward. Vanceinfo Technologies (NYSE:VIT) is in a similar situation where downside risk exceeds upside potential after Tuesday.
Fushi Copperweld (NASDAQ:FSIN), China Automotive (NASDAQ:CAAS) and Zhongpin Inc. (NASDAQ:HOGS) are stocks with a more sustainable upside, according to the overbought chart below.
There are no oversold China stocks other than China Unicom (N YSE:CHU) and China Telecom (NYSE:CHA). Both stocks fell unusually hard in the last two weeks and are ripe to enjoy a hefty re-bounce.
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.