Moving averages (MA) remain widely used and are one of the most popular trend-following indicators for identifying trend reversals and the sustainability of trends. The moving average forms the basis for many other indicators, including Bollinger Bands and exponential moving averages.
The simple moving average (SMA) is the simplest of moving averages. The calculation is based on adding all the data and dividing the result by the number of periods to minimize the noise in the day-to-day price swings.
The exponential moving average (EMA) is like the SMA. The difference between the two moving averages is the calculation of the former focuses on the latest prices. For instance, if today is Friday, the EMA will give more weight to Thursday’s price than those from Monday.
An exponential moving average (EMA) Ribbon is a series of sequential exponential moving averages plotted on a chart, with the different moving averages creating a ribbon-like indicator. The periods of the moving averages can vary from short-term to long-term averages.
The resulting ribbon of averages provides traders an indication of both the trend direction and strength of the trend by analyzing the distance between moving averages and the angle of the acceleration.
Interpreting the EMA Ribbon is straightforward. If it is a primary uptrend with the price trading above the EMA ribbon and expanding, it signals a bullish condition. The bulls are in complete control. Buy or maintain long positions under this scenario.
The warning of a trend reversal occurs when the trend starts to fade. The first warning occurs when the price moves below the first moving average. When the price then moves below the second average it confirms the start of a selloff.
Another important focus is the width of the Exponential Ribbon. If all EMAs are trending in parallel and evenly spaced, this signals a solid trend. However, if the Ribbon is expanding and EMAs are widening over time, this warns that the current trend may be ending. If the ribbon is contracting and EMAs are getting closer together or even crossing, it can signal the start of a new trend.
Like the two-moving averages crossover trading strategy (i.e., golden cross or death cross), the EMA moving averages can help to identify a trend reversal when the EMAs crossover.
One final point worth mentioning about the EMA Ribbon strategy, it can identify potential pivotal support and resistance zones.
The EMA Ribbon is an effective trend indicator that can confirm the health and duration of its primary trend. The expansions and contractions of the Ribbon can also signal strength and possible trend changes. Like other technical indicators, it is best to combine the EMA Ribbon strategy with other indicators and technical analysis techniques.
SPX EMA Ribbon Interpretation:
The SPX Index (SPX) shows the EMA Ribbon in a rising uptrend. The 10 EMAs are 20-periods at 4,099.73, 25-periods at 4,087.79, 30-periods at 4,077.97, 35-periods at 4,069.73, 40-periods at 4,062.58, 45-periods at 4,056.22, 50-periods at 4,050.45, 55-periods at 4,045.15, 60-periods at 4,040.26, and 65-periods at 4,35.75.
Around 10 points separate the shorter EMAs (i.e., 20, 25, 30). The longer EMAs (i.e., 65, 60, 55, 50, and 45) are evenly spaced by around 5 points.
Golden crosses occurred on 3/29/23 as the shorter EMAs first crossed above the longer EMAs, triggering the recent sharp SPX rally toward pivotal resistance near 4,195.44 (2/2/23 high).
However, the pace of the SPX uptrend has begun to slow, as evidenced by SPX stalling near 4,169.49 (4/18/23), signaling a consolidation phase or the start of a selloff.
Because the EMA Ribbon remains in an uptrend and continues to widen, it suggests further near-term gains are possible over the next few days, possibly into the end of the week/month.
Watch the 20-day EMA (4,099.73), as it is crucial initial trading support. A violation warns that the current trend may be ending if broken. A breakdown below the 25-day EMA (4,087.79) further confirms the trend reversal, at least from a near-term perspective.