This refers to the situation in which the demand for an asset has increased to such an extent that it has pushed the asset price to a level that no longer supports its fundamentals. In such a case, the asset is considered to be overvalued. Consequently, a market correction will almost certainly occur, with the logical result of a decrease in its stock price.
Overbought is a term used by technical analysts. This is because technical indicators and oscillators are mathematical, statistical models, which express graphically, the force and velocity of market movements, based upon prices and/or volumes of stocks.
One of their applications is to detect situations of overbought and oversold assets. There are a vast number of indicators and oscillators, but one of the most commonly used is the Relative Strength Index (RSI) as this can determine if an asset is overbought or oversold by comparing the magnitude of recent gains to recent losses.
RSI = 100 - (100 / (1+RS))where RS is the average of x days price increases/average of x days price decreases.
The RSI ranges from 0 to 100. An asset is overbought if the RSI approaches 70, meaning that it may be getting overvalued and is a good candidate for a pullback, or in other words, it could be a good moment to sell. Likewise, if the RSI approaches 30, the asset is oversold.