A few weeks ago, the last place anybody would expect to see a pocket of strength was in technology. The sector had lagged all year long, and had a particularly rough time during the May selloff. Yet, now, tech names are popping up as the best opportunities. The caveat is bigger than usual though.

In most cases, the trend is your friend. That's just the trite way of saying that traders are better off trading in the same direction as the trend, instead of against it. But this time, the bullish bias on tech stocks is rooted in a potential reversal. The problem is, trying to catch a reversal is like trying to catch a falling knife - you don't want to get it wrong. However, it doesn't change the fact that if the market recovers from its recent lull, technology stocks are poised to offer the biggest reward...at the price of a decent-sized risk.

Since hitting a high of 553 in late April, the Dow Jones Technology Index (DJUSTC) fell by 15.3%, when it hit a low of 467.57 just last week. It's nothing particularly unusual, as the rest of the market made a similar move. However, the size of technology tumble was bigger than average...which is why it's being eyed today. As we've seen since the middle of 2004, these major pullbacks have all been met with major buybacks, accurately signaled by a stochastics chart (highlighted). If history holds true, the possible upside move could carry the index back up to the upper resistance line, which would be near 580 by the time it could move up to that line. That's about a 20% rally, which may seem huge, but we've seen them that big before (see 2004).

The downside is clearly the possibility that the index doesn't bounce out of this oversold situation. We'll give it a little time and room, but any trade under last week's low of 467.57 would be enough to convince us that the bounce isn't going to materialize.

Comparing the possible 100 point gain to a possible 25 point loss makes for a compelling risk/reward scenario. The question is, are the odds of a summer rally good enough to merit getting bullish on the most volatile of all the sectors? We'd say yes. In fact, we'd go as far to say that a summer rally is crucial to any technology rally. If stocks don't get some bullish traction soon (as in this week), then the market may pack it up until fall, so to speak. However, internal proprietary indicators say the odds of a bounce from here are high. Keep a short leash on things though.

Dow Jones Technology Index (DJUSTC)

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