March 31, 2014 (Chinavestor ) There are couple of ways to assess what's happening to Chinese stocks these days. One is to look at latest moves, big and small, and go from there. The other is to look at current move and then put that into perspective. This is what the overbought and oversold monitor is doing. The chart displays today's price compared to where it was two weeks ago. This is represented by the white arrow. The chart displays normal trading range or trading envelope in addition, this is the blue band. Finally, the chart calculates theoretical high and low prices where probability is only 1%-3% that the stock is going to trade there based on historical records.
The first approach, looking at the latest move of the day, is widely used. Based on this investors should pay attention to stocks like NetEase Inc. (NASDAQ:NTES), SouFun Holdings (NYSE:SFUN) when it comes to momentum. CNOOC Ltd. (NYSE:CEO) and Shanghai Petrochemical (NYSE:SHI) are stocks of interest to the downside. See second part of the following chart.
The problem with such an approach is obvious. One day big move can be just a result of a longer trend. Let's take a look at SouFun Holdings (NYSE:SFUN). The stock fell 17 times out of the last 19 trading days. This gives that Friday's advance is a bounce, may be a dead cat bounce, but is certainly not a sign of further strength.
This is why the overbought and oversold indicator is useful. This puts current price moves into perspective.
Based on this, Petrochina Co. Ltd. (NYSE:PTR), Huaneng Power (NYSE:HNP), Chinese telecom and some smaller stocks have sound momentum.
The same approach reveals that SouFun Holdings (NYSE:SFUN) was oversold before last Friday and that 4.0% bounce that day is a result of a technical condition, e.g. SFUN was extremely oversold before the move.
The same monitor explains why WuXi Pharmatech (NYSE:WX) is still in trouble just like 51jobs Inc. (NASDAQ:JOBS) is. Both have fallen and approached theoretical lows, but haven't reached extreme oversold position yet.
Sohu.com Inc. (NASDAQ:SOHU) fell below the trading range but again, has not reached theoretical lows yet. The stock may continue to level off but downside pressure remains.
Sina Corp. (NASDAQ:SINA) fell hard as well and more risk is still present. SINA can fall as low as $55.4 before reaching theoretical low prices.
See oversold China stock chart for details.
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.