An asset is described as overbought when a momentum oscillator — most commonly the RSI — reaches a high threshold, typically above 70. The idea is that buyers have pushed price up so fast or so far that a pause or reversal is statistically more likely than a continuation of the same pace.
The critical caveat: an overbought reading is not a sell signal by itself. During strong bull markets, assets can remain overbought for extended periods as momentum reinforces itself. Selling purely because RSI exceeds 70 has historically been a losing strategy in uptrending markets — the position can continue rising well after the indicator flashes a warning.
The overbought concept is more useful as a caution rather than a trigger: it is a prompt to examine whether the move is driven by fundamentals or pure momentum, to check market breadth, and to look for divergence. Combined with resistance levels or a deteriorating breadth reading, an overbought signal carries more weight than it does standing alone.