March 10, 2014 (Chinavestor) This we all know: the most overbought stocks are most vulnerable when market sentiment sours. This is why the following Chinese stocks are under pressure today.Perfect World Co. (NASDAQ:PWRD), E Commerce China Dangdang (NASDAQ:DANG), Trina Solar (NYSE:TSL), and CNinsure (NASDAQ:CISG). Technical indicators don't work well for small cap, low trading volume stocks like China Gerui Advanced Material (NASDAQ:CHOP) and China Gerui Adv Material (NASDAQ:CHOP). This is why we disregard them despite these are on top of the overbought chart.
What matters is trading volume. When a stock has sufficient trading volume, technical indicators make sense. Based on the overbought indicator, Perfect World Co. (NASDAQ:PWRD) is the first "real" stock on the overbought screen. PWRD is trading very close to theoretical highs this morning and is highly vulnerable. Theoretical high price for Perfect World (NASDAQ:PWRD) is $26.7 and Friday's close at $25 is just too close to that price, according to the following chart. Downside risk exceeds upside potential for PWRD at this point.
E Commerce China Dangdang (NASDAQ:DANG) is the second stock on the screen below. DANG advanced too fast, too much in the past few weeks and thus is considered overbought. The pace of advance is highly unusual not only for DANG itself but compared to other Chinese stocks as well. DANG is under pressure going forward, no doubt.
Trina Solar (NYSE:TSL), a Chinese integrated PV manufacturer, is next on the overbought screen. Trina Solar (NYSE:TSL) is subject to profit taking now that is advanced over 20% in the past two weeks.
CNinsure (NASDAQ:CISG) has been steadily advancing from the lower end of its trading envelope to way above the trading range. The pace of advance has been gradual, a good sign going forward. Yet the stock is considered overbought and is expected to take a breather soon.
The following screen lists the most overbought US listed Chinese stocks.
Definition of 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.