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Despite a correction in Shanghai, Hong Kong China stocks hang on

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pre-624-tumbThe Shanghai Composite Index continued to slide on Friday, closing just over the 3,000 mark for the week. The index lost 7.47% this week lone, marking it the worst weekly loss for the index in 2009. Investors cite liquidity and growth concerns but the correction was timely and right - just as our analysis has revealed over a month ago: DON'T Panic! China Stock Correction was Timely

Trading in Hong Kong got caught in between a positive Wall Street and a negative Shanghai. The result was a dismal trading day with not much action. The Hang Seng Index ended up gaining 32.03 points or 0.13% to 20,893.33. Resource players shined, Yanzhou Coal (HKG:1171)(NYSE:YZC) advanced 2.3% following news that Felix's board, an Australian coal miner, agreed to a sell-off of the company to Yanzhou. Sinopec (HKG:0386)(NTSE:SNP) advanced 2.0% followed by Guanghen Rail (HKG:0525)(NYSE:GSH).  But Chinese airliners and power generators fell, spelling trouble for China Eastern Air (NYSE:CEA), China Southern Airlines (NYSE:ZNH), and Huaneng Power (NYSE:HNP) ADRs.

going back to New York, Chinese stocks look good on technicals. The number of overbought Chinese ADRs fell heavily from last week and is very low. This in turn suggests a bullish sentiment for China stocks. should the DJIA continue to stay close to 2009 records, China stocks will follow suit.

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Looking at Chinese indices and ETFs from a technical point of view, the picture is neutral except for the Shanghai Composite and the Morgan Stanley China (NYSE:CAF). Both are on the slide but if current weakness is just a correction, as predicted, CAF has serious upside potential for the rest of the month.

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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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