Overbought/Oversold

Fancy Way to Say: Too Far Too Fast There are many technical indicators which can be used when charting securities. There is a family of indicators called oscillators which signal when a security has moved too far too fast in a particular direction. Overbought indicates a security has run up much more than is usual for the it in a given period of time. Conversely, oversold indicates a security has sold off much more than usual in a given amount of time. The indicator implies the security is due for a breather. Many will interpret a breather as a reversal. That is, a security which is oversold is due for an upside bounce while an overbought security would be due for a decline. However, the way oscillators are designed, an overbought security can leave the overbought area simply by churning sideways for a time. The same holds true for and oversold condition. As with all indicators, it is just one piece of a larger puzzle and its use is often more effective when coupled with other analysis.

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