Sunday, March 17, 2013

Candlesticks: Homing Pigeon

The homing pigeon is the same as the harami (see bullish harami and bearish harami signals), except for the color of the second day’s body. The homing pigeon is composed of a two-candle formation in a down trending market. Both candles are the same color as the current trend. The first body of the pattern is a long body and the second body is smaller. The open and the close of the second day occur inside the open and the close of the previous day. When a homing pigeon present itself it indicates that the trend is over.
Criteria for Homing Pigeon:
  • The body of the first candle is black (or red) and the body of the second candle is black (or red).
  • The downtrend is evident for a good period of time and a long black (or red) candle occurs at the end of the trend.
  • The second day opens higher than the close of the previous day, and closes lower than the open, but still above the closing price of the prior day.
  • Unlike the western inside day, just the body needs to remain in the previous day’s body. Please note that the inside day requires both the body and the shadows to remain inside the previous day’s body.
  • For a reversal signal, further confirmation is required to indicate that the trend is moving up.
Signal Enhancements for the Homing Pigeon
The higher the second candle closes up on the first black (or red) candle, the more convincing it is that a reversal occurred.
Pattern Psychology
After a strong downtrend has been in effect and after a long black (or red) candle, the bulls open the price higher than the previous close. The shorts get concerned and start to cover. The price finishes lower for the day but not as low as the previous day. This is enough support needed so that the short sellers take notice that the trend is violated. A strong day following would convince everyone that the trend is reversing. Usually the volume is above the recent norm due to the unwinding of short positions.

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