Despite a beautiful set of fundamentals, the Australia 200 Index is behaving badly.

The reporting season now drawing to a close broadly shows solid sales growth and better earnings growth. Recent data shows an expanding Australian economy (GDP +2.8% yoy), and leading indicators such as building approvals suggest this is more likely to accelerate.  A lower Australian dollar is speaking directly to an improved trade performance, and is stoking demand. And the RBA's statement this week is indicating "a period of stable interest rates".

So why is the index showing signs of a coming sell off?

chart of australia 200 index

After a strong climb from below 5100 to the post GFC highs around 5460, the index has repeatedly failed to break through, despite all the good news. This is in itself a bad sign.  With this morning's pull back we now have a double top in place (chart below). Additionally, we have a candle stick reversal pattern forming - a strong up day, a day of indecision, followed by a fall.

To me, all of this adds up to a sell.

I stress that this is a short term call. Almost everything other than the price action is pointing to higher levels for shares, particularly over an investment timeframe of 12 months. How far could it fall?

20140306 xjo

One of the features of recent market sell offs is bargain hunters sitting under the market. For this reason I'm expecting only a shallow sell off. However, even a 38.2% retracement to levels around 5325 gives a worthwhile reward/risk ratio:

20140306 tkt