What is the Bullish Homing Pigeon
The bullish homing pigeon is a candlestick pattern where one large candle followed by a smaller candle with a body is located within the range of the larger candle's body. Both candles in the pattern must be black, or filled, indicating that the closing price was lower than the opening price. The pattern may indicate that there is a weakening of the current downward trend, which increases the likelihood of a reversal.
BREAKING DOWN Bullish Homing Pigeon
Bullish homing pigeons are bullish reversal patterns, but some research has suggested that it's a more accurate bearish continuation pattern. When used to predict a bullish reversal, traders should watch for the pattern to occur at the bottom of a strong downtrend, and consider exiting short positions or entering long positions. The pattern is less meaningful as a bullish reversal when it occurs in choppy market conditions.
This candlestick pattern is similar to an inside day, where a candlestick's entire price range falls within the price range of a previous day. The only difference is bullish homing pigeons only look at the open and closing price rather than the entire daily range. This makes them slightly less common than inside days, but both bullish homing pigeons and inside days predict potential reversals ahead.
As with most candlestick patterns and other forms of technical analysis, bullish homing pigeons work best when used in conjunction with other technical indicators or chart patterns. These chart patterns can serve as confirmation of a bullish reversal. For example, a trader might identify a bullish reverse head and shoulders chart pattern and wait to enter into a long position until they spot a bullish homing pigeon candlestick pattern. Many traders also like to pair the bullish homing pigeon with momentum indicators, which are helpful in spotting when downtrends are losing momentum.
Bullish Homing Pigeon Example
Let's take a look at an example of a bullish homing pigeon in Qualstar Corp. (QBAK):
In this example, the bullish homing pigeon appeared at the end of a strong bullish downtrend. The stock moved nearly two percent higher on the following day marking a potential reversal of the downtrend. The relative strength index (RSI) also reached oversold conditions at 30.0 around the same time, which provided traders with confirmation of the bullish reversal thesis. Traders may have also looked at the declining volume on the bearish days, which may have suggested that the sell-off was losing momentum.
Chart courtesy of StockCharts.com.