We should really expand on the documentation for [overlay], as it can be quite useful.
The overlay layer is effectively merged separately on to each layer below it, where those layers have pixels. For example, consider a frog 🐸 character where the skin markings are on an [overlay] layer. The frog's arm would get the markings. The frog's body would also get the markings, even under the arm. It can be useful for shadows, highlights, etc that would be painful if they had to be painted on to multiple overlapping layers.
The inspiration for [overlay] came from Nick in this thread. You can see how it works in his video, starting at 0:26:
That said, if it doesn't work for you please post a PSD showing what you expect to work and we'll take a look!
