Overbought

Overbought is a technical analysis term describing a condition where a security's price has risen sharply and rapidly, potentially beyond its intrinsic value, suggesting that a correction or pullback may be imminent. It does not mean the price will definitely fall — merely that the probability of a reversal or consolidation has increased.

The most common indicator used to identify overbought conditions is the Relative Strength Index (RSI), developed by J. Welles Wilder. RSI measures the speed and magnitude of recent price changes on a scale of 0 to 100. A reading above 70 is traditionally considered overbought. Other indicators include the Stochastic Oscillator (overbought above 80), the MACD (when the MACD line is far above the signal line), and Bollinger Bands (when price touches or exceeds the upper band).

Consider a practical example: Infosys stock has rallied from ₹1,400 to ₹1,600 in two weeks (14.3% gain). The 14-day RSI has climbed to 78. This overbought reading does not mean you should immediately sell — it means the stock has moved unusually fast and may pause or pull back before continuing higher. Overbought conditions in a strong uptrend can persist for weeks.

The distinction between overbought in a trend and overbought at a reversal point is critical. During strong bull runs, the Nifty 50 can remain in overbought territory (RSI > 70) for extended periods. In 2023–2024, several multi-week streaks of overbought readings occurred during the broad market rally. Selling purely because of an overbought reading during such trends would have been premature.

Overbought signals are most reliable when combined with other evidence: bearish divergence (price making new highs but RSI making lower highs), approaching a known resistance level, declining volume on the recent advance, or negative news catalysts. The opposite condition is Oversold, where the security appears to have fallen too far, too fast.