Overbought is a technical designation applied when momentum indicators like RSI (above 70), Stochastic (above 80), or similar tools signal that recent buying pressure has been unusually intense relative to recent norms. The key insight is that overbought is not the same as expensive — it measures price velocity, not value. In strong uptrends, stocks can remain overbought for extended periods because the trend itself sustains the elevated reading. This is why overbought signals used in isolation to call tops frequently fail in trending markets. The most reliable overbought signals occur in range-bound conditions or when accompanied by bearish divergence (price makes a new high but the oscillator makes a lower high), price meeting major structural resistance, or a broader deterioration in market conditions. Overbought readings are best used as a reason to tighten risk management or look for exit signals rather than as direct short triggers.
