THE OMINOUS CALL OF THREE BLACK CROWS

The three black crows candle formation does not happen very frequently in stock trading, but when it does occur swing traders should be very alert to the crow's caw.

The candlestick pattern's metaphor is three crows sitting in a tall three. Essentially, it is a reversal formation that occurs following a strong advance.

On the day the first black crow makes its appearance, the formation is most predictive if the first "crow" -- or dark candlestick -- closes below the white candle's real body. That is the first step in setting up a Minor trend reversal -- where today's high is lower than yesterday's high and today's low is below yesterday's low.

Two more long-bodied consecutive down days then ensue. On each of these days, it appears as if the stock wants to regain its former strength, as the stock opens higher than on the previous day. By the end of each session, however, the sellers regain control and the stock drops to a new closing low. Here is what three black crows candlestick pattern looks like:

Note that the lower shadows on three black crows are small, or in some cases even nonexistent. Although three black crows is a complete pattern in and of itself, swing traders should always be alert to what happens on the fourth day after the pattern is formed. Since there has been intense selling throughout the pattern, the stock may then be overextended to the downside. However, if the stock continues its negative pattern on the fourth day, then it is likely that the issue is going much lower.

The chart of Openwave Systems (OPWV) below, while not a classic example of three black crows, nevertheless illustrates many of its main features. Note that in late September the stock bottomed near $12 when two lower shadows in three candles tested the bottom Bollinger band. A Minor rally, which lasted eight trading days, then took OPWV back into an area of strong resistance just above $14.

On the first day of the three black crows pattern, which I've circled in the chart above, the black candle negatively engulfed the previous doji. (This is often a potent reversal signal in and of itself.) Days two and three follow the three black crows script closely, with the candles opening near their highs and closing near their lows. During this time, MACD and stochastics both gave sell signals and Openwave broke below its important 30-day moving average.

On the fourth day, the best the stock could eke out was a doji-like candle at $13. From there, Openwave fell below $11 before finally staging a short-term rally. Despite recent strength in the S&P and Nasdaq, the shares still remain well below the level at which the three black crows formation took place, and they should face significant resistance at $12.

Be very alert when you see three black crows appear on a chart. Their appearance indicates a period of powerful selling pressure. If on the fourth day the stock cannot gather strength, then lower prices are likely ahead.

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