Hewlett Packard Enterprise Company (NYSE:HPE) is trading lower on Thursday. The shares gained almost 8% yesterday after the company announced new security measures. But the stage may be set for a reversal. The shares are overbought and at resistance. This is why Hewlett-Packard is our Stock of the Day.

Many trading strategies are based on the concept of reversion to the mean. If something becomes overextended in one direction, there is a good chance that it reverses and heads back the other way.

For example, if a stock is overbought, sellers will come into the market. Their selling could put pressure on the shares and push them lower.

Traders can use various tools to determine whether a stock overextends. Two popular ones are Bollinger Bands and the Relative Strength Index (RSI).

The red line on the chart is a Bollinger Band. It is two standard deviations above the 20-day moving average.

According to statistics and probability theory, 95% of trading should be within two standard deviations of the mean. If the shares are above this, they would be considered to be overbought.

As you can see on the chart, that's the case now.

The RSI is on the lower part of the chart. If the blue line is above the horizontal red line. it indicates overbought conditions as well.

In addition to being extremely overbought, Hewlett has also reached a resistance level. This can be seen on the chart.

Sometimes when a stock reaches a resistance level, it reverses.

Resistance is a level at which there is a large number of sellers. If the stock can't break resistance, some of the sellers become anxious and impatient. They begin to undercut each other, hoping to bring buyers to them.

This results in a downtrend.

Overbought stocks that reach resistance tend to sell off. It may happen with Hewlett.

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