Three Black Crows - Pattern Trading Strategy

THREE BLACK CROWS

The upside-gap two crows consist of two black candles. If there are three declining consecutive black candles, it is called three black crows pattern (see Exhibit 4.26). The three black crows presage lower prices if they appear at high price levels or after a mature advance. Three crows are also sometimes called three winged crows. The Japanese have an expression, "Bad news has wings." This is an appropriate saying for the three-winged crow pattern. The three crows are, as the name implies, three black candles. Likened to the image of a group of crows sitting ominously in a tall dead tree, the three crows have bearish implications. The three lines should close at, or near, their lows. Ideally, each of the openings should also be within the prior session's real body.

Exhibit 4.26. Three Black Crows

Exhibit 4.27 illustrates three black crows started April 15. The descent from the three black crows continued virtually unhindered until the piercing pattern at P. The second and third black candles of the three black crows (April 16 and 17) opened under the prior real bodies. While the normal three black crows has an opening within the prior real body, and these openings were not in the black real bodies, they could be viewed as more bearish. This is because the second and third black candles opened under the prior day's close and failed to gain substantial ground throughout the remainder of the session.

The three black crows would likely be useful for longer-term traders. This is because this pattern is completed on the third black candle. Obviously, by the time this occurs the market has already corrected substantially. For example, these three black crows started at $70.75. Since we needed the third black candle to finish the pattern, we got the signal when the stock was at $67.87.

Exhibit 4.27. Pennzoil-Daily (Three Black Crows)

However, in this case we received an inkling of trouble on the first black candle session of the three black crows. The reason is that the stock opens above the prior March high of $70, but by session's close the bulls were unable to sustain the new highs as it closed back under $70. As you will see in Part 2 of this book, if the market makes a new high and fails to sustain, it could have bearish implications. This is what unfolded here.

Let's also look at the prior highs at areas 1 and 2. During time frame 1 in early February, Pennzoil was ascending to new highs for the move, but the candles gave us a strong visual warning flare that all was not well. Specifically, during the latter part of the week of February 2, although the stock was making higher highs, higher lows, and higher closes—it did so with small real bodies and long upper shadows. This certainly showed that the action was not one-sided in favour of the bulls. The price retreat ended at the bullish engulfing pattern at B. A rally from there pushed prices up until the week of March 2, shown as area 2 on this chart. The rally at 2 was similar to the rally at area 1 insofar as area 2 had higher highs, higher lows, and higher closes,

and as such would look healthy if this were a bar chart. However, from a candlestick perspective, this price ascent on March 4,5, and 6 had long upper shadows. This proved the rallying strength was being dissipated. The candle line on March 6 was a shooting star.