Overbought and Oversold

The phrases describe a bounded oscillator sitting near the top or the bottom of its own range. The reading is a statement about the indicator's arithmetic — recent closes have been high, or low, relative to the range the formula measures them against — and not a statement that an instrument is expensive or cheap. Nothing in the calculation contains a valuation, and the level at which a reading is called extreme is a threshold someone chose, published with the indicator or set on the chart. The behaviour that surprises people follows from the bound. During a sustained move an oscillator can reach its extreme early and stay there while price continues in the same direction for a long time, because the indicator has run out of scale and price has not. So the reading records that a move has been persistent, which is not the same thing as a reason to expect it to end. Any interpretation beyond "the indicator is near its limit" comes from the reader rather than from the tool.