Back in July, we went generally bullish on technology - for the first time in a long time. At the time, there were still a few liabilities to deal with, but overall we liked the opportunities in the sector.  In fact, we even got specific about industries within the sector. While we were excited about all of the major ones, we felt software and semiconductors were a little overbought. However, the hardware stocks were looking a little underpriced. Between then and now, all three industries have pretty much behaved as we expected them too. Hardware stocks have gained 25.6% over the last six months, while software and semis have trailed with an 11.4% and 11.9% return, respectively.

The reason we wanted to bring all of that up today was twofold. First, we wanted to have some closure on our previous commentary, as all of our forecasts have pretty much been fulfilled. Second (and perhaps more importantly), we wanted to send an update on what we see next for this exciting, and usually volatile, sector.

Technology, In General

We're fans of the tech sector in the coming year. We've seen steady progress in these stocks from mid-2002, by virtue of a long series of higher lows. For our chart of the Dow Jones US technology Index (DJUSTC), this has created a couple of key support lines, drawn in blue below. One is minor, and one is major, but both are important. However, it's important to keep the bigger picture in mind. As of right now, the Dow Jones Tech Index has hit resistance at 542 for the second time in nearly two years. That's not a major surprise to see a little hesitation there, as a move above that mark will be the first time this index has seen those levels since early 2002......and it was still on the way down at that point! We'll cut these stocks a little slack for the time being, as they deserve a rest anyway (they've been on a roll since mid-October). We're looking for a retest of the 50 day average (purple) before the Dow Jones Technology Index has enough gas to get above 542 AND stay there. In other words, we're looking to buy on a dip, at around 490. After that, look for a move to 560, or even higher. As you can see from the chart, there's plenty of room for these stocks to recover.

Dow Jones US Technology Index - Weekly

Semiconductors

The short-term overbought condition is even more apparent on the chart of the Dow Jones Semiconductor Index (DJUSSC). After peaking at 1365 in early December, this chart has been sliding backwards ever since. That turnaround occurred right at a major resistance point that will certainly come back into play at some point in our future.......as it already has three times now. The RSI tool does a pretty good job of highlighting those overbought situations, as you can see on our chart (highlighted). In the meantime, we wouldn't be surprised to see this chart pull all the way back to 1145, where that long-term support line is resting.

Dow Jones Semiconductor Index - Daily

Software

Software, on the other hand, is looking pretty attractive at its current levels. We're switching gears a little bit here and using a CBOE Index rather than a Dow Index (the Dow's index was surprisingly choppy). We're opting for the CBOE GSTI Software Index (GSO) instead, which basically tells the same story as the Dow Software Index chart, but with a lot less noise. In any case, it's not as overbought as most tech stocks are right now, and we're seeing clear support at the 50 day average (purple), as well as a longer-term support line. More than that, though, we like the fact that these stocks have been off the radar, so to speak. Most - if not all - of the potential for big gains here have still been mostly untapped, as the industry has been a little lethargic. We feel comfortable buying under that resistance level of 175, from late last year. Once that resistance line is breached, though, things could really heat up. We have no target here, but we are setting a stop at the 200 day average, currently at 162.

CBOE GSTI Software Index (GSO) - Weekly

Price Headley is the founder and chief analyst of BigTrends.com.