The Piercing signal is found at the bottom of a downtrend.
In order for the Piercing signal to be valid, the following conditions must exist:
The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
The second day of the signal should be a white candle opening below the low of the previous day and closing more than half way into the body of the previous day’s black candle.
The following Figure shows a Piercing formation. The bears are having fun in the downtrend. Then one day the price gaps down. There is panic in the street. Everybody wants OUT! But that is the exact point smart money starts buying. They recognize this fear and know how to profit from it. They manage to close the candle more than half way into the previous day's black candle. As in the case of the Dark Cloud signal, the half way point criteria is very important to keep in mind. If on the next day the bulls can hold control, the bears will move away and the downtrend will have a high chance of reversal.
What signal will be formed if the close of the white candle is above the open of the black candle?
The chart below for Gilead Sciences, Inc. shows a Piercing signal in June '06. The stock was oversold as shown by the stochastics. The day after the Piercing signal was formed, the bulls were still piling in. This was an excellent time to get in and ride the uptrend.
Chart courtesy stockcharts.com
The chart below shows how the bulls got control in SESAGOA after a Piercing signal formation. The critical point is for the second candle to close over the mid way of the first candle. In this case stochastics were also in the optimal oversold area creating a high probability reversal scenario.
Chart courtesy icharts.in