murthyavr,
Points 1 and 2 are correct.
When oscillator stays in overbought region for 5 bars or more, it is called excessive overbought phase and it needs time to dissipate the energy.So when after 5 bars, it comes out of the OB zone, it is not a low risk sell entry, the market may make another 2-3 bars is correction and make a new high and we try to buy this correction instead of selling.
But when market stays in overbought region for very long time say for 8-9 bars or more, the buying force fizzles out...hence it is not a good idea to buy after 8-9 bars as market cannot continue its upward march indefinately.
After say 5 bars in the OB region market comes out of it, we consider it as a correction only if it does not go into oversold region.Because if our assumption is that market is excessively bullish, it should make a shallow 2-3 bars correction and go to the new top. Instead if it takes a very deep correction and goes into an opposite oversold zone, then the bullish assumption gets nullified.
I have tried to give the thought behind all the actions ...hope it helps in understanding the OB/OS phenomenon correctly.
Smart_trade