This is a legend that was explained to me when I was in Chile a couple of years ago.It is a well known story in Chile with numerous references to it in Artwork and Music
The Pincoya is, according to local mythology, a female “water spirit” of the Chilotan Seas. The Pincoya is said to have long blond hair, be of incomparable beauty, be cheerful and sensual, and rise from the depths of the sea.
Naked and pure, she personifies the fertility of marine species. Through her ritual dance she provides the chilote (resident of Chiloé) with an abundance or deficiency of fish and seafood. If she performs her dance facing the sea, it means that these shores will have an abundance of fish. When she dances facing the mountains, her back to the sea, seafood will be scarce. Chiloean mythology is appreciative of the Pincoya, believed to be good, beautiful and humanitarian. According to other legends, Pincoya is the daughter of Millalobo (king of sea, in chilote mythology) and the human Huenchula. Her sister is the Sirena chilota (a type of Mermaid) and her brother is Pincoy (who also is her husband). The three siblings lead and guide the drowned sailors onto a large phantom ship, the Caleuche, sailing the seas at night around the southern island of Chiloé in southern Chile. The ship appears briefly intact with sounds of a party on board, but quickly vanishes. Myth has it that once on board, the dead can resume an existence as if they were alive again.