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Correction is inevitable for China stocks

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watch_out February 6, 2012 (Chinavestor) Chinese stocks became vulnerable to a technical correction by Monday as the following chart testifies. It is time to take a breather for all of those stocks that have reached theoretical highs. Some of the most likely ones to move: CNOOC Ltd. (NYSE:CEO), Focus Media Holdings (NASDAQ:FMCN), Tudou Hold. (NASDAQ:TUDO), HSBC Plc. (NYSE:HBC), Perfect World (NASDAQ:PWRD), among others. Investors have to remember that overbought is not identical to bearish. It just suggests that stocks, especially those that reached theoretical highs, have to take a breather before resuming a rally. Downside risk exceed short term upside potential for CNOOC Ltd. (NYSE:CEO), HSBC Plc. (NYSE:HBC) from the NYSE while NASDAQ listed Tudou Hold. (NASDAQ:TUDO),  Perfect World (NASDAQ:PWRD) and those on the top of the list are also vulnerable.

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KongZhong Corp. (NASDAQ:KONG) is not considered oversold despite recent decline.

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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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