Newsletter October 2006

Technical Tools on Chinavestor.com   We have always prided ourselves by providing unique fundamental analysis of the U.S. listed Chinese stocks. These reports are aimed at the Professional level subscribers though we post some of the most intriguing ones for sale to the general public also on the website. The benefit of in-house fundamental analysis became evident when we have been picking a “Stock of the Month” or we’ve been updating both growth and conservative portfolios in the Newsletter, or the “Weekly Stock Recommendation” list for our “Advanced” level subscribers. The track record of such services are outstanding without a doubt. Please look up the “Track Record” page on the Chinavestor website for the latest updates. Moreover, our Newsletters have been focusing on fundamental analysis for the most part. Analysis that is not available anywhere else and fills up an information gap. Let me just highlight the latest few issues that captured fundamentals such as money flows, liquidity, risk, reflections on earnings seasons and such. However this issue will be different. Based on feedbacks from our subscribers, we understand the need for technical analysis within the Newsletter. For this reason, this issue will detail three of our pure technical reports that are updated on a daily basis and are available to our “Advanced” level subscribers. The first one, called “Pre-Market Report”, features a short market summary coupled with the most recent news to give traders a comprehensive look at the most relevant information in a glimpse.  This report consists of four segments: a short summary of yesterday’s trading in the U.S. markets with a Hong Kong overnight trading update; a news section with the most relevant stock and market specific news; a section with institutional buying/selling interest; and a technical summary of the U.S. listed stock universe. The second indicator, called “Overbought / Oversold” report, is looking for stock extremes that offer trading opportunities. This short term indicator gives traders a chance to look at the whole stocks universe in a glimpse and to assess which stocks look interesting for trading purposes. This report displays stock specific trading ranges and direction for each individual stock and puts current moves into perspective. Use of this tool will be described in the second part of this Newsletter. The third report, called “Cross-listed Blue Chips” takes advantage of the phenomena that U.S. listings follow overnight Hong Kong trading patterns.  The correlation between Hong Kong and U.S.—either NYSE or NASDAQ—listing is very close and is practically equal to one. Considering that for most U.S. listed Chinese companies Hong Kong is the home market, following Hong Kong trading is more than essential. Our third report is doing just that enabling traders to anticipate U.S. opening price with acceptable accuracy. By definition, the “Chinavestor Daily Pre-Market Report” below, is designed to give traders a summary of the markets, capture the most relevant news and actions of investors with a comprehensive technical look at the market as a whole. Remember, this report is published on the website each morning by 8 A.M. eastern time under the “Stock Analysis” tab under the Chinavestor menu. And as such, it delivers a short summary of yesterday’s Chinese ADR trading and the trading of the Hong Kong Stock Exchange (HKEx) with highlighting the index and the stock components that have moved significantly up or down. This information is located within the Market Performance section on the top of the report. The News section is updated in the morning to deliver the most relevant facts to the subscriber’s desk. The news is typically stock specific and market oriented in nature. The Significant Corporate Actions section is designed to give traders an idea as to what the institutions, e.g. shareholders that move the stock, are doing. We have a link to the HKEx and we receive notice at the time a significant share transaction takes place. Then this notice is checked and if relevant, we incorporate the information within the report. The best use of this information is that if we see an accumulation of shares of a specific company, we think it indicates significant buying power and that share price appreciation is likely to follow. Or following the same logic, significant selling is likely to result in price depreciation and we want our subscribers to be aware of that. And finally, the “Technical Measures” section of this report looks at the whole ADR universe and checks on technical indicators such as  current prices vs. 52 week highs and lows, stock prices vs. 20-, 50– and 200-day moving averages (DMA), stocks with up and down volumes and a common measure called Relative Strength Index or RSI. The second report we publish before the market opens is the so called “ADR Universe Overbought/Oversold” indicator. By definition, a stock is overbought 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 on the right. A sharp advance from $15 to $30 in two 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 (blue stripe) and is approaching the theoretical high (OB). 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 and too fast and might be due for a pullback. We regard a stock oversold 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 on the right. 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 and too fast and may be due for a reaction rally. With all that said, one can ask how to use the OBOS indicator. Generally, if the arrow approaches the theoretical low (OS) limit it is considered bullish for the underlying stock. Conversely, if the arrow pulls back from the OB position it is a bearish signal. Some traders identify the long-term trend and then use extreme reading for entry points. If the long-term trend is bullish, the oversold readings could mark potential entry points. The definition of the stripes and arrows is this: the point of the arrow is the last price of the security, the base of the arrow is the stock price a week ago. The blue stripe represents the trading envelope, a band, where the stock has been trading in the last 50 days. The OB and OS positions represent the theoretical high and low positions. With that knowledge, it makes perfect sense to use the overbought/oversold indicator to compare relative pricing of cross-listed stocks.  The basic assumption is that over time, Hong Kong and U.S. listings of the same security correlates virtually perfectly. So by comparing relative overbought and oversold positions of the same stock in different markets reveals price asymmetry. We also have to remember that the HKEx is the home market for most of the foreign listed Chinese securities and as such the U.S. listing tend to follow overnight HKEx price changes. So our methodology is this: first we create the overbought/oversold diagram for all HKEx and U.S. cross listed securities. Then we measure the size of the arrow; this is the indication for big price changes. Again, the size of the arrow is a stock specific number that reflects stock characteristics. For this reason, the bigger the arrow the greater the price change. This method enables us to filter out the biggest price movers that are out of sync from normal trading bands. Second, we look at the position of the arrow. The closer the arrow is either to the theoretical high or theoretical low position, the more interesting that stock is. And by comparing the HKEx listing’s arrow position to the U.S. listing’s arrow position, this gives us a look from a different angle how to interpret the results the best. And finally, we compare the arrow position in the HKEx to the U.S. position. The bigger the gap between the points of the arrow in the different markets, the most likely the U.S. listing will follow the HKEx move. The second page of the Cross-listed Blue Chips report, that is not featured here at this time, features all the HKEx and U.S. listings next to each other allowing traders to look at the whole stocks universe all in one glimpse. For a detailed description for definitions or questions regarding how to use the reports properly, please don’t hesitate to contact us either by phone or by e-mail: 1-203-463-9416 info@chinavestor.com To access latest Newsletter and other research content, please register!