ASX 200

Going into Thursday's session, the market had rebounded 250 points, or 5.5 per cent, off its recent lows of 4508 on November 5, and after the surprisingly strong unemployment numbers (more than 24,000 jobs were created in October) tested the 4800 level but lacked the impetus to go higher. The strong employment data did allow the Australian dollar to hit a high of US93.70c. While a December interest rate rise was never off the table, market thinking had been that the central bank might pause for reflection but the strong employment data put a December interest rate rise firmly back on the table in many traders' eyes.

Despite weakness over the past two trading sessions, materials stocks finished the week as one of the index's strongest sectors, gaining more than 4 per cent. Last week we began to see evidence of commodity price forecasts (which have significantly trailed spot prices) being upgraded by brokers, leading to upward earnings per share revisions and higher valuations. All of a sudden we could see stocks that are trading at 20 times 2010 earnings, and considered expensive, being repriced at 15 times 2010 earnings and being viewed as good value. This is the rationale behind expectations of materials stocks leading any Santa Claus rally.

A noticeable pick-up in merger and acquisition activity in recent weeks and expectations for this trend to continue over the next 12 months is also expected to underpin equities going into 2010.

From a technical perspective, trading action late in the week saw the ASX 200 run into strong resistance at the 4770 to 4800 level, which represents the September 29 high and also the downtrend line from the October 15 high. This could also be the top of the right-hand shoulder of a bearish head and shoulders pattern, although a break of the neckline at 4485 would be needed to confirm this. This week's price action shows a rejection at this key resistance.