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At the bottom right of the screen, there is a red or yellow alien icon for each alien that the currently selected soldier can see. Occasionally, when a sniper is selected, some of these icons have a yellow reticle on top of them.

What does this mean?

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up vote 33 down vote accepted

It means that the alien would normally be outside of the sight range and thus not a valid target, but the sniper can shoot at it because of the Squadsight skill.

It's the skill which allows a sniper to fire on targets which are outside of its view range when another soldier can see it. Note that you still need an unobstructed line-of-fire for this to work.

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Both are correct.

yellow reticle is for sniper Squadsight skill

Yellow head means flanked and red means target is in cover.

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+1 for the yellow vs red explanation – Geo Oct 20 '14 at 2:31

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