As mentioned before, overbought stocks are those that trade at a level above fair value. When a stock becomes overbought, it's heading for a retreat — they tend to rubber band back after they get too far away from their longer term trend line. Recent or short-term movement in the price of the security shows that it's likely that the price will correct in the future. You can use different forms of analysis to learn estimates of a stock’s value.
When you engage in technical analysis, it involves identifying trends and patterns through charts in order to evaluate investments and trading opportunities. Overbought stocks can be fundamentally overbought or technically overbought. You can identify technically overbought stocks based on price action and historical data rather than fundamental analysis. Fundamentally overbought stocks can be identified based on the company's financial statements.