EUR/GBP fell, and then bounced on Wednesday in order to form a hammer. I hated seeing this, as I have been short of it for a couple handles now. However, I have been trading long enough to understand that sometimes the market will give you signals as to when it's time to get out for the meantime. I feel that this hammer is one of these signals.
The fact that this hammer has appeared at roughly the 0.79 level suggests to me that a bounce is coming. As you can see on the accompanying chart, we had a bearish flag break down and it's been a straight shot retest. Markets never move in one direction forever, and I feel that this market once the bounce because of the oversold conditions against the Euro all around.
Patiently biding my time
The hammer is the one candle that was going to give me a reason to get out of this trade before the 0.76 level. However, having said this I am more than willing to sell this pair again at higher levels. I think ultimately that the Euro needs to fall quite a bit, and a lot of the money on the continent will move into the UK in order to find a bit of a safe haven.
I believe that the 0.80 level is an excellent shorting area, and if we see some type of resistive candle in that zone, I would be very happy to be short of this market. As for buying, even though I see a potential bounce at this point in time I see no reason to get involved. After all, the trend is most decidedly down, and let's face it - the odds of a negative headline coming out of Europe are pretty high.
On a break of the bottom of Wednesday's hammer, I would reenter short at that point as it would show a real breakdown in this pair. Granted, this is the least favor way for me to reenter market as I feel I have "given up" some pips. My suspicion is that the bounce and will happen, and as such we should get opportunity to sell this pair at higher levels and end up profiting even more in the long run.