(August 17, 2009 Chinavestor) Monday turned to be one of the worst day for Chinese investors both in Shanghai and Hong Kong. The Shanghai Composite Index fell 176.34 points or 5.79% to 2,870.63 sending the index 17.3% lower for the month. Resource and metal plays led the decline on global economic worries. Petrochina (NYSE:PTR)(SHA:601857), an index heavy weight, fell 6.1% but Aluminum corp. of China (601600)(NYSE:ACH) fell 10.0% to its daily limit. Copper and other metal stocks suffered on weakened outlook for metal prices. There is another problem for Shanghai investors, the large number of retail investors, who tend to follow the crowd. This herd behaviour is responsible for extreme volatility as is evidenced by the fast up and down swings of the Shanghai Composite.
Trading in Hong Kong was almost as bad as in Shanghai. The Hang Seng Index fell 755.68 points or 3.62% to 20,137.65 on Monday. Copper, aluminum, coal, oil companies led the decline while weak earnings from Ping An Insurance (HKG:2318) raised earnings concerns as well. Aluminum Corp. of China H-shares(HKG:2600) fell 6.48%, Petrochina (HKG:0857) fell 5.14%. Forty two stocks out of the forty four member Hang Seng Index fell on Monday.
S&P and NASDAQ index futures point to a lower open for Wall Street. With a disastrous market day in Hong Kong and Shanghai, the perfect strorm is brewing for Chinese stocks. but as our technical indicator point out China stocks are not expensive and have retreated from previous highs already, thus a big loss on Monday creates opportunitites for cheap entry points.
Looking at Chinese indices and their trailing ETFs, the Shanghai Composite is getting close to the oversold position just as is the Morgan Stanley China Fund (NYSE:CAF). This position is not as bad in my opinion. An oversold position represents an opportunity for the intelligent investor who sees a dip as a possibility for an easy entry. The Morgan Stanley China (NYSE:CAF) is the best way to play China's A-share market. CAF under $32 looks as a good buy to many. The rest of the indices - Hang Seng and China ADR index, look not too exciting at this point.
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.