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Three Black Crows – Bearish Reversal Signal

Jul. 17, 2013 9:35 AM ET
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Seeking Alpha Analyst Since 2011

Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for Risk-Free Portfolios" and "Options for Swing Trading" (both Palgrave Macmillan). Thomsett also writes for www.TheStreet.com and the StockCharts.com Top Advisor Corner 

Chartists continually seek reliable reversal signals in many forms. Among the most reliable is the three black crows candlestick pattern. It recurs often and provides very strong likelihood of reversal of an uptrend.

The distinguishing characteristic of the black crows patterns is that it includes three consecutive sessions, all black (moving downward). Each session opens within the range of the previous session and then closes lower. While three consecutive sessions is a minimum for this formation, it may include many more as well.

Consecutive sessions of the same color provide very strong indicators. However, the patterns can be contradictory or may deceive traders. For example, some formations of all black sessions are bull signals. An example is the squeeze alert, three consecutive sessions, each closing and opening within the range of the previous session and getting progressively smaller. Just as the bull squeeze alert involves three black sessions, the bear squeeze alert has the same pattern but involves three consecutive white sessions.

Another variation of the black crows is one in which the opening price is equal to the closing price of the previous session, a matching line as part of a broader bear trend. Like all candlestick indicators, this one provides a strong likelihood but not a guarantee of reversal. Accordingly, it is crucial even with strong candlestick formations to find and rely on confirmation. This two-part entry or exit process should serve as the base for a trading strategy. Whether you are a day or swing trader or just an investor who likes short-term trades as part of a broader portfolio, act only if and when you find confirmation. This may be found in additional candlestick formations revealing the same likely reversal; momentum oscillators like RSI or MACD; volume indicators like OBV; or traditional Western signals like head and shoulders, double tops, and repetitive gapping price action right after the black crows.

A final point concerning black crows and all other reversal signals: You must have an uptrend to reverse or it cannot be considered a valid reversal sign. Also, reversals have stronger likelihood of steering you in the right direction when they appear close to the borders of the trading range. The three black crows, as a bearish reversal, is strongest when it shows up right at resistance. If price has moved through resistance, black crows may shows up as part of a reverse-and-fill price move.

The same is true on the opposite end. Bullish candlesticks are strongest when they appear right at support. The opposite of three black crows is the bullish reversal, three white soldiers. As long as a downtrend has occurred, there is something to reverse. When price moves down through support, the white soldiers may represent a reversal back into the trading range. But this also requires confirmation from other signals. Proximity of reversals to support or resistance is itself a strong confirmation of the validity of what you are seeing, but you still need independent confirmation.

To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Weekly Newsletter I look forward to having you as a subscriber.

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