Invesco Pharma ETF (PJP) Shows Strength: Why It Could Be Poised for Further Gains

By Frank Cappelleri

The Invesco Pharmaceuticals ETF (PJP) is currently demonstrating impressive outperformance, making it a compelling subject for technical analysis. Its recent performance and underlying chart structure offer valuable insights into identifying relative strength in the market, a crucial skill for discerning potential trading opportunities.

Technical Breakdown of PJP

A closer look at PJP's daily chart, tracing back to July, reveals a pattern of ascent through the summer, a peak in late August, a pullback in October, followed by a renewed advance. However, a broader perspective is essential. The current uptrend actually commenced in late March and extended through mid-August. The subsequent correction found robust support between $119 and $120. This zone is significant as it aligns with previous price congestion from July and the 38.2% Fibonacci retracement level of the March-to-August rally. The confluence of these support factors strongly suggests a healthy pullback within a larger, established uptrend, with buyers actively re-entering the market at a key technical juncture.

Bullish Patterns and Upside Targets

Adding to the positive outlook, PJP has a track record of bullish chart patterns delivering on their projected upside targets. Between March and May, an inverse head-and-shoulders pattern emerged, and its breakout successfully reached its target, fueling a multi-month rally. A similar scenario unfolded in October when PJP held support and formed another bullish pattern. This pattern remains active, with a potential upside target of $137.

Weekly Chart Confirmation

The weekly chart further solidifies the bullish case. PJP has been in a sustained uptrend since at least 2023, marked by breakouts to new all-time highs and consistent gains throughout 2024 and earlier this year. A forthcoming breakout would represent the fourth such occurrence, underscoring the ETF's persistent strength.

Relative Strength Indicators

One of the most straightforward methods for identifying relative strength is to scan for ETFs trading above their 50-day and 200-day moving averages. PJP has consistently remained above its 50-day moving average and has not breached its 200-day moving average in a considerable period. This strength is particularly noteworthy when contrasted with the broader market performance. As of Thursday morning, November 5th, only about 25% of the roughly 170 ETFs tracked were trading above both key moving averages.

Consider the Semiconductor ETF (SMH) as a comparison. While SMH traded above both moving averages for much of the year, it began to show weakness in July. It has since struggled around its 50-day moving average and recently dipped below its 200-day moving average. Applying the relative strength criteria would have excluded SMH while keeping PJP firmly in focus.

Conclusion

The core principle of successful trading involves aligning with areas exhibiting relative strength. PJP exemplifies this, showcasing strong performance through successful bullish patterns, resilient support during pullbacks, sustained breakouts, and favorable moving-average positioning. As other market segments experience technical deterioration, PJP continues to stand out as a compelling investment opportunity.

Frank Cappelleri is the founder and president of CappThesis, an independent research firm specializing in chart and statistical analysis for active investors. He brings over 25 years of Wall Street experience as an equity sales trader, technical analyst, research sales specialist, and desk strategist.

DISCLOSURES: (None)

All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and may not be suitable for your particular circumstances. Seeking advice from your own financial or investment advisor is strongly recommended before making any financial decisions.