The 5 period is a very fast-moving average, so fast that you often can’t pin an exact price level on it. But it serves a very specific purpose, it wants to be tapped. This comes into play often when we’re moving up and away, and it acts as support along a very strong uptrend/downtrend. So we can use it as a measure of the trend. But there is a special time, when a new candle opens, and rather than opening close enough to it, it opens so far stretched from it, that despite other signals of strength, be it bull flags or what not, it creates the scenario where it is just more likely that upwards continuation can’t continue without being tapped. So, for playing countertrend, an opening candle that is floating above or below the 5ema becomes a signal that says, “hey wait a minute”.
In practice, it means yes you can play towards the 5 tap. But it also means it gives you an extra little bit of confidence/or less confidence in a play that will or will not play out. A bull flag where the 3rd candle is floating above is less likely to play out on that candle. A weekly open floating above the 5ema is less likely to continue bullish without some consolidation to make it tap (whether in time or price). This is very different than when the candle opens near it, and then has a bit more mobility to go in either direction.
In essence the 5ema becomes a probability detective in a trade.
This was what I posted in my weekly prep: “The 2W and the weekly charts will also be opening floating quite a bit above, and while we can certainly trade up higher as these past 9 weeks have shown, there is still a high likelihood now that we're opening floating above them, rather than opening near them and drawing up further, that we will look for a tap”.
This gave confidence in bear plays due to the floating candle, and then accelerated by the market.
It doesn’t mean it always works, but this is one way that we can use our knowledge set not only to scout a setup, but to take it one step further and say, ok, here’s a pattern, what are some signals that increase or decrease the likelihood it plays out.
Other examples we often use for the same purpose: correlation trades, with/against the direction of the market, aggressiveness of bulls/bears for volatile setups.
Please note: There are times that we can certainly go up and away without touching the 5ema. It is simply one extra piece we can use. For the last 2 weeks, SPY went up without touching it, the first time it didn’t open that far above though, the second it made a marginal higher high and stalled. You can also use the number of candles that haven’t touched, and other factors (time of year etc) to similarly raise or lower your probabilities.
