It’s a scary day in markets today. Stocks are getting beat-up like the credit crunch was still raging and the S&P 500 have given up some important support. Commodities are down big. The Australian dollar is getting crushed despite a rate hike that wasn’t fully expected. And our long gold trade is giving back most of its gains (but it’s still in the money).

Everyone knows the markets are in for a rough ride at some point after the generational rebound from The Great Recession. Is this the big correction? We think it could be, but our conviction is still low.

In the meantime, we look to the charts. Yesterday, we talked about USD/JPY and we have to note that it got as high as 94.99. We warned about the possibility of a false breakout. Now that we’re back to 94.40, we think the chance of a reversal is growing but we reserve judgement until Japan comes back from holiday at the end of the week.

The pair we want to focus on today is EUR/GBP. The euro is getting smashed today. Greek 2-year yields are back up to 14% and European policymakers must be starting to think about hitting the panic button.

Two months ago, the euro was beating up on the GBP on worries about a hung parliament in the UK. Now, it seems like electoral deadlock in Thursday’s election is among the most minor problems in the eurozone and its periphery.

This is an important break below support at 0.8601. We expect a bounce to a re-test of this line and that bounce should be sold. The problems in Europe far outweigh concerns in the UK. Moreover, the Conservatives have gained momentum heading into the election and could pull out a majority (we put the odds at 50-50).

We target 84.50 or 84.00.

The euro fell below the April 9 low of 0.8706 today on growing concerns about the indebtedness of Greece, Portugal and Spain. Now, a continued to fall to the January low of 0.8601 looks likely.

There is some support at the 100-week moving average at 0.8656 but the market is clearly favouring the GBP over the EUR.

Fundamentally, there is reason to like this trade as well. The market now seems to have come to terms with a hung Parliament in the UK and past history has shown that the GBP can still rally in such a situation. Now, the focus has moved to a growing inflation problem in the UK. With the consumer price index over 3% in the UK and still showing signs of momentum it is highly likely that the BOE will raise interest rates before the ECB (or the Fed for that matter).

With the concerns continuing to mount about Greece and Portugal, the euro is in bad shape. Debt spreads rose to a record high of 522 basis points in Greece today and even a rescue package may only prove a brief respite. It seems the market is now also targetting Portugal, where spreads also hit a record high today.

Expect this pair to fall to at least 0.8400 but exit the trade if the downtrending channel is pierced on the upside.

The euro continues to get battered on worries about Greece and the pound sterling continues to bounce on hopes for a clear Conservative win in the May 6 election.

Technically, we are seeing a nice channel moving lower on the two hour chart. Above that, there is further resistance from the month-long downtrend.

At one point, we sense a great deal of optimism about Greece. The European Union appeared united and the austerity plan seemed legitimate. That is all starting to change. It’s clear EU leaders can’t work together and Greece continues to find hidden debts.

The bond vigilantes returned today and pushed Greek spreads to a fresh record of 410 basis points above German bunds (10-year). For euro traders, that’s a sell signal of the clearest kind. The Greek story is about to take another leg for the worse and there is no trade but to sell the euro.

We can’t remember a time, in many years of trading, that the market has been so focused on 200-day moving averages. It seems like everyone has them up on their screens. It seems to have started with the breakdown in EUR/USD to the 200-dma, the subsequent stabilization and then the second leg lower. We have also seen fascinating interactions with AUD/USD and AUD crosses and the 200-dma.

At the moment, we are looking at EUR/GBP, which is flashing some very strong technical signals.

The 200-day moving average is in red and we can see that the market has now failed twice in efforts to close above the key level. The second key point is that we have now put in a double-top at 88.41 that targets 83.60. Finally, the double-top/200dma resistace comes in right at the bottom of old support from mid-November.

It all adds up to a brilliant show of convergence that has every technical trader pounding the sell button today. We have also added the RSI to show that it’s also flashing sell signals.

We can think of some fundamental reasons to stay out of this trade but we never fight the technical trend and in this trade, it’s very clear.

You can’t always be first to the party but when it’s the best party in town, there  will be plenty of good times to go around.

UBS is out with a note advising clients to short EUR/GBP today at 0.8815 on concerns about Greece’s deficit and dovish rhetoric from the ECB. They also expect an economic recovery in the UK. They have a target of 86.00 and a stop at 89.30.

We have been watching this chart and if it makes sense fundamentally to UBS, it certainly makes sense technically to us. The target and stops seem relatively arbitrary but strike a nice balance between risk and reward, so we won’t quibble with them too much.

Here’s a look at the daily chart with the target and the stop drawn in:

We can see that a top occured around 0.94 and that morphed into a flag formation that is actually bullish but with the break of support at 0.8833, it turns ugly and points to further losses.

As a short-term trade, it takes some nerve to jump in right now. We have seen five consecutive days of declines and the technical  momentum indicators are looking severly oversold. We are reminded of AUD/JPY recenly, however, and that moved in a straight line for 11 consecutive sessions.

Conservative traders might look to sell a rebound at 0.8850, risking only 80 pips while agressive traders are likely to see a set-up that’s too good to miss, even if there is a potential for a sideways, choppy trade before we see the big move down. With UK CPI upcoming, the big move could be sooner rather than later. In any case, this is probably a party you don’t want to miss.