Writer and director Mike Hodges' couldn't find an actress willing to play the lead until Martin Scorsese convinced Rosanna Arquette to take it.
Despite decent reviews, the film quickly fell into obscurity because of distribution problems both in UK and the US. The film's UK distributor, Palace Pictures, was going broke at the time, so in need of a quick cash influx, they decided to pull the movie from theaters almost immediately after its small premier and sell it to a video distributor. In the US, where Miramax handled its distribution, things ended up being even worse for the movie. Since Miramax was also in financial trouble, they never even bothered to send it to theaters but opted instead to release it straight to cable. However, it did get a theatrical release in Japan, where it did well. Director Mike Hodges believes that movie found an audience there because Japanese audience generally likes ghost stories.
In the book 'Get Carter and Beyond: The Cinema of Mike Hodges', the film's writer and director Mike Hodges mentions how he loved working with Jason Robards. He also talks about the differences between Robards' natural old-school approach to acting, where the actor simply becomes the character, and Arquette's more modern method acting, where the actor first gets into the mindset of the character.
While filming his previous movie, an action TV film set in Florida called Florida Straits (1986) with Raul Julia and Fred Ward, director Mike Hodges fell in love with the locations of Charlotte, North Carolina where the movie was actually being filmed. He planned to return there to shoot again in the future, but once he finally did for Black Rainbow, he realized that the old town was gone, so he had to rebuild many of the old houses and buildings to get the setting he wanted. Coincidentally, there's an unintentional reference to this in the movie when Robards' character mentions that 'the developers have arrived'. With this, Hodges wanted to point out that even the town itself was losing its identity and being callously destroyed and reshaped just like the planet itself.
Rosanna Arquette hired a real-life psychic called Laura Day and prepared for the role together with Day and her own acting coach Susan Batson. However, their interpretation of the way Martha should act during her seances was vetoed by director Mike Hodges. He wanted Martha's act to be a subdued performance, and not one filled with energy and emotion like that of a televangelist. After a serious clash over this, even though quite upset, Arquette eventually gave in and agreed to play the scene the way Hodges wanted. She later agreed that when it comes to these seance scenes, his colder and 'more English' approach did indeed give better results than her more lively 'American' approach.