No, it isn't possible to over soak wood chips, chunks, planks, or any other size that you want to throw on the grill (within reason, I wouldn't soak them for weeks because the water would get scummy). In fact, the directions given often grossly underestimate optimal soaking time. I assume this is because the manufacturer doesn't want to scare people off by saying "soak for 12-24 hours before use."
Wood smokes better when it's wet. If it's dry, it catches on fire and produces less smoke for a shorter period of time. What you really want is for the wood to be thoroughly wet so that it smolders rather than flames and produces lots of smoke for a long time.
As you would expect, the larger the piece of wood, the longer it will smoke and the longer you need to soak it. My general soak times are as follows:
- Small Chips - These are very small, coin sized. Generally get totally saturated in 2-3 hours.
- Large Chips - Between Small Chips and Chunks. Soak for 12 - 24 hours.
- Chunks - These tend to be about 1/2 to a whole fist sized. These want to soak for at least 24 hours.
- Planks - For plank smoking. Soak for 8 - 12 hours.
You can always soak for less time, you just won't get quite as much smoke production. Judge the need based on what you're cooking. If you want a little smoke on a steak that you're only cooking for 5-8 mins, then you don't need to worry about it. If you're trying to smoke salmon, it matters more. If you want to smoke a butt for 12 hours, it matters a lot.