The black marubozu is simply a long black (down, or red on the charts below) candle, with little to no upper or lower shadows. The pattern shows that sellers controlled the trading day from open to close, and is therefore a bearish pattern. The candlestick can provide a trade signal or analytical insight into the future direction of a stock price. While it is a bearish pattern, often the context in which it occurs is more important than the candlestick itself. Seller control is especially worth watching near resistance and near support, as either case provides the likely possibility of further selling. When the market closed on July 31, four stocks had significant black marubozu candlesticks. With the right context in place, these stocks face potentially big moves over the next week.
Potash Corp. of Saskatchewan (NYSE:POT) has been moving lower since early 2011. The stock has continued to make lower highs in 2012, with the most recent rally experiencing resistance in the $46 area, which is well below the price highs near $48 seen earlier in the year. The lower short-term high, coupled with the longer-term downtrend makes the recent black marubozu pattern a potential sign of trouble. The candlestick indicates a high and the stock will likely head lower to test support at $42.96 - the July 27 low. If that low is breached, more significant selling is likely to develop with an initial target of $40. The June 4 low at $36.73 is the next price of interest, and may provide support, although the downtrend points to the price falling below it. A rise above $46.25 is bullish, nullifying the marubozu pattern as the stock is likely to move higher to test resistance at $48.
Priceline.com (Nasdaq:PCLN) started out the year very strong but has fallen off since April. June and July have been essentially flat, creating a price range between $700 and $600. The black marubozu pattern on July 31, after the price neared the upper portion of the range in the prior session, signals resistance has held and the price is likely to head toward support at $620 to $600. There are likely still some bulls in this stock though, and a rise back above $700 will put upward pressure toward resistance at $750 to $774.96 (52-week high). A break below $600 is significant and confirms a downtrend is underway. The initial target is $541, followed by $526.
Lowe's Companies (NYSE:LOW) is very close to pivotal support at $25, due to a July 31 black marubozu candle. On May 23, the stock tested $25 before bouncing back above $28. In July the $25 level had been probed a couple of times as well. A drop below $25 is likely to initiate the next wave of the downtrend, with a target of $21.60. Resistance is at $27.25. If the buyers push the price back above that level. It could cause a pop towards the June and July highs of $28.71 and $28.63 respectively.
Energy XXI-Bermuda (Nasdaq:EXXI) has been making lower highs since topping out at $39.65 back in February. Through July the stock has made attempts to move higher, but has failed near $33.60 each time. The black marubozu candle on July 31, after hitting the resistance area two days prior, points to rising selling pressure and test of the July low at $28.98. If the selling continues below $28.98 there is little support until $26 - the major June low. On the other hand, a rise back above the recent high at $33.60 shows that selling pressure has been replaced with buying, and the stock could rally towards $38.
The Bottom LineThe black marubozu is a fairly simple and common candlestick pattern. In the right context though, it can be a significant warning of a further decline in a stock. Whether selling continues in these stocks is unknown as of yet. Buying could re-emerge, nullifying the pattern. Therefore, control risk with the use of stops when trading candlestick patterns. One potential location for a stop is above the recent price swing high.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.