I'm sure you have heard of the Relative Strength Index before. Most traders use RSI strategies to help spot extreme levels in the market.
First, you really need to know more about the actual indicator itself.
RSI is a momentum indicator or oscillator that measures the speed and change of price movements in a security.
Traditionally it will move between 0 and 100. A stock is usually considered overbought when RSI is above 70 and oversold when RSI is below 30.
However, RSI is NOT a great signal just to have at an extreme. You have to see some kind of divergence with RSI and the underlying security to get a valid signal.
RSI does identify divergences between price and momentum and these signals are much more consistent (not perfect) than just simply looking for extremes. As the more advanced traders can tell you, RSI can stay very high or very low and trade with trend strength.
That's why looking for the divergences is so important!