Overbought and Oversold
Overbought and oversold describe conditions in which an asset's price has risen or fallen so quickly that a pause or reversal may be more likely, as judged by indicators.
These terms come from technical analysis. An asset is called overbought after a strong, fast rally, and oversold after a sharp drop. They describe the speed and extent of a recent move, not whether the asset is fundamentally expensive or cheap.
The most common tool is the Relative Strength Index: readings above 70 are usually labeled overbought and below 30 oversold. The stochastic oscillator uses 80 and 20, and prices touching the outer Bollinger Bands are interpreted in a similar way.
The big caveat is that overbought markets can keep rising and oversold markets can keep falling. During strong trends, indicators may stay in extreme zones for weeks. Many traders therefore wait for confirmation, such as RSI dropping back below 70, before acting.
Example: after a stock jumps 25% in two weeks, its 14-day RSI reaches 82. A chartist would call it overbought, but this alone does not indicate when, or whether, the price will pull back.