If Chinese small and microcap stocks are known for one thing, it’s probably being one of the more volatile asset classes out there. Sure, some of these stocks can be plenty controversial as well, but even the good apples in the Chinese microcap barrel are volatile. Obviously, volatility can cut both ways. It’s great on the upside and a real a pain in you-know-what on the downside.

That has certainly been the case for China XD Plastics (Nasdaq: CXDC) in 2012. The stock has had its trials and tribulations to start 2012, but in the past month, the shares are in the green and over the past week, buyers started stepping in, sending China XD Plastics up more than 5.7%. The good news is despite all the volatility, China XD Plastics still sports a sound technical outlook.

Microcap Technicals Looking Better

On its recent pullbacks, the stock has been able to find support at rising uptrend line that dates back to October 2011 and the higher lows are a bullish sign. That uptrend line currently runs right into the $5 area, which also looks like it’s serving as psychological support. In other words, once China XD Plastics starts flirting with $5 on the downside, buyers start finding the stock appealing. Perhaps more importantly, the stock has never dipped below its 200-day moving average during any of its 2012 price retrenchments. Remember, a stock that is still above its 200-day line is considered to still be in an uptrend.

The next technical hurdle for China XD comes in the form of reclaiming its 50-day moving average, which is just pennies away. From there, $5.50 would be the next legitimate technical hurdle and if that hurdle is cleared, China XD could easily see $6 or high, especially if Chinese policymakers lend a hand with some economic stimulus.

Microcap Fundamentals Looking Strong

Economic stimulus would of course be a fundamental catalyst, but China XD already has those in spades. You see, the Chinese automobile market is the largest in the world. Want to know why shares of Ford (NYSE: F) and General Motors (NYSE: GM) have been such solid performers in 2012? Sure, part of it has to do with the resurgent U.S. economy. The other part has to do with increased demand for cars in China.

From Oppenheimer regarding China’s auto market: “Despite macro uncertainties, we expect healthy (albeit slowing) GDP growth, continuing urbanization trend and a relatively low vehicle penetration rate to drive solid rebound of the auto market (~8% growth).”

Want to know what Oppenheimer’s top pick among Chinese auto-related stocks is? That’s right. China XD Plastics. “Following a transformational year featuring a 55% increase in production capacity, successful upgrade to a ‘big 4’ auditor, and $100M investment from a high-profile PE investor, we expect CXDC to continue to ride on favorable trends in increasing plastics use per vehicle and gradual localization of the Chinese auto plastics market and deliver superior returns for investors,” Oppenheimer said, according to TheStreet.com.

CXDC Looks Like a Bargain – let’s see if the earnings keep pace

And that growth potential comes with a stock that trades for less 3.3 times forward and less than 1x book value. That looks like a bargain if Chinese auto sales keep climbing and the company’s earnings keep pace.

Note: Earnings release scheduled for Monday – http://finance.yahoo.com/news/china-xd-plastics-company-ltd-120000371.html

Posted by MIke Casson                                                                                                                                                                        Executive Editor