Last week was quite a week indeed. With one of the largest individual day rallies seen in market history, almost everyone assumes that it was "caused" by the CPI news, explains Avi Gilburt of

In fact, I was emailed by a few long-time trolls on Seeking Alpha, trying to explain to me how it was so "obvious" that the market rally was "caused" by the CPI report.

Forgive me if I fail to see the "obviousness" of such a claim. So, allow me to quote something I wrote to the members of this past week regarding this claim:

"Yes, I know some of you are rolling your eyes right now asking yourself "Avi, can't you see what happened today?" Well, to be honest with you, I look past the surface. While it may seem that the CPI report "caused" this market rally if you look at the market superficially, I view it as being a catalyst for a rally that was setting up under two wave counts, I have been outlining, as both were pointing higher...

Moreover, this morning, I got an email on Seeking Alpha from one of my "trolls" who said to me "it is so obvious that the CPI is what caused today's rally. You have to be an idiot to believe otherwise." Well, I responded to him by asking him do I have to be an idiot, too, to believe the CPI report caused the 10%+ rally after it was announced on October 13?

Remember, the last CPI report came in much worse than expected. Yet, the market began a 10%+ rally off that report. So, if I am going to be intellectually honest and consistent, I think it makes much more sense to view these reports as "catalysts" for market moves rather than causes. If they truly were the "cause" of the move then the market would have ended up in the red by 5% of more three weeks ago, especially based upon much of the analysis that was being presented at the time regarding what would be seen if the CPI came in hotter than expected. So, if you do not believe it is reasonable to view the last CPI report as having "caused" a 10%+ rally, isn't it equally reasonable to believe it did not "cause" this rally? Again, I am just trying to be logically and internally consistent in my intellectual perspective. So, it is much more accurate to call these reports "catalysts" rather than "causes."

I hope I am making myself clear about this perspective. This is why I do not even need to know the substance of the report...all I need to watch is market action. The substance of the report is truly immaterial at the end of the day. If I would take stock in the substance of the report, I would have been fighting the last 10%+ rally we saw in mid-October due to being swayed by the "story."

To drive this point home even more, allow me to repost something I wrote right after the October 13 CPI report came out:

On October 11, just two days before the CPI number was announced, Bloomberg ran an article entitled, "JPMorgan Says Too-Hot CPI Would Put Stocks at Risk of 5% Tumble." And, they were not the only one.

Then, on Thursday morning, the CPI report outlined that inflation was hotter than expectations. And, while the market did drop pre-market, the day ended quite differently. In fact, by the time we closed, the market rallied almost 6% off the lows, and ended up green by over 2.6%.

And, boy, did it leave people scratching their heads. I saw quite a few comments on Seeking Alpha which mirror this sentiment:

"Am I the only one wondering what the heck is going on with this market? I feel like it makes no sense anymore. Today made NO sense."

In fact, in a Barron's article later that day, the author outlined the common feeling in the market that day:

"It was a massive rally, and one that came out of nowhere. And it's left market observers like yours truly wondering what the heck just happened. There wasn't any new data, no headline-making speeches, no event that occurred just after the open to spur such a move. It literally came out of nowhere—and left us grasping for possible reasons. "Today's market reversal was a head-scratcher," writes Oanda's Edward Moya. And he's not wrong."

But, before the CPI data was published on Thursday, I wrote the following to outline how one should view market news based upon several studies that have been performed over the last 30-40 years:

I want to remind everyone of something that Alan Greenspan said 20+ years ago:

"It's only when the markets are perceived to have exhausted themselves on the downside that they turn..."

Now, sometimes, we can see a catalyst, which triggers the move in the opposite direction. Yet, it is not really needed, as many market studies have shown that many large moves do not even see a catalyst.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled "What Moves Stock Prices," they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

However, the study concluded that "macroeconomic news...explains only about one fifth of the movements in stock market prices." In fact, they even noted that "many of the largest market movements in recent years have occurred on days when there were no major news events." They also concluded that "[t]here is surprisingly small effect [from] big news [of] political developments...and international events." They also suggest that:

"The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news..."

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years' worth of "surprise" news events and the stock market's corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:

"Most such jumps weren't directly associated with any news at all, and most news items didn't cause any jumps."

Within the same update that Wednesday evening, I outlined my views on where I think the market was headed:

"Thus far, the market has made several attempts at hitting the blue box support region on the 60-minute SPX chart. And, each time, divergences continue to grow. And, if you look at the 5-minute SPX chart, there is still opportunity to actually strike that support below as long as we remain below the smaller degree resistance noted...but I think we will likely be much higher than where we stand today as we look out towards the end of October, or even into early November, depending on how long it takes the market to bottom out, and how fast the rally I expect takes hold."

As we now know, the CPI report on October 13 was worse than market participants expected. Yet, the market ended the day almost 3% higher than the day before. In fact, while the initial reaction was to the downside, the market rallied 6% off the low struck that day. But it did not come as a shock to our members. That morning, before the market even opened, and as we were hovering near the lows of the day, I sent out an alert at 8:56 AM noting my expectation for a bottom:

"This should now be the selling climax that completes the downside structure."

The market bottomed within half an hour of my alert.

Now, please take note that my views were not based upon economics, upon news, or upon anything other than mathematics.

So, if one is being truly honest with themselves, and trying to present their analysis in a consistent fashion, if a negative CPI report "caused" a 6% reversal in the SPX, should not a more positive CPI report thereafter "cause" a negative reaction?

Or, can we more reasonably say that the substance of the initial report really did not provide us with a clear indication for market direction, but acted as a catalyst to the market move we saw? If we are honest with ourselves, we must come to this conclusion. Well, unless you are some of the commenters or analysts who come up with convoluted reasoning as to why the market rallied when it was "supposed to" have crashed.

To those who subscribe to the "convoluted reasoning" principle, allow me to again quote a brilliant two paragraphs penned by Robert Prechter in his seminal book The Socionomic Theory of Economics (a book which I strongly urge each and every investor to read):

"Observers' job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn't fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to "psychology," which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren't prodigious enough to concoct a credible causal story.

Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators' mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist."

So, before you claim that the cause of the market rally this past week was "obvious," maybe we need to re-think how markets move, or at least how we provide reasons to market moves. Therefore, if we are going to be intellectually honest and consistent in our analysis of markets, maybe we need to be viewing these reports as "catalysts" rather than causes, with the underlying substance of the report not always being indicative of the direction of the move in the market, as we have seen on October 13. In fact, my analysis was looking up towards the 3957-4018SPX region on Wednesday before the CPI report was published. As I have written in the past:

"Until the times of R.N. Elliott, the world applied the Newtonian laws of physics as the analysis tool for the stock markets. Basically, these laws provide that movement in the universe is caused by outside forces. Newton formulated these laws of external causality into his three laws of motion: 1 - a body at rest remains at rest unless acted upon by an external force; 2 - a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 - for every action, there is an equal and opposite reaction.

However, as Einstein stated: "During the second half of the 19th century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."

However, even though physics has moved away from the Newtonian viewpoint, financial market analysis has not.

"Many services and financial commentators in newspapers persist in discussing current events as causes of advances and declines. They have available the daily news and market behavior. It is therefore a simple matter to fit one to the other. When news is absent and the market fluctuates, they say its behavior is "technical"...every now and then, some important event occurs. If London declines and New York advances, or vice versa, the commentators are befuddled. Mr. Bernard Baruch recently said that prosperity will be with us for several years "regardless of what is done or not done"...In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions." - R. N. Elliott

External events affect the markets only insofar as they are interpreted by the market participants. Yet, such interpretation has been guided by the prevalent social mood. Therefore, the important factor to understand is not the social event itself, but, rather, the underlying social mood which will provide the "spin" to an understanding of that external event."

Therefore, in my market view, the CPI report on October 13 was a catalyst for the market low I was expecting, with this recent CPI report simply providing us with the catalyst to take us to our next higher target. I think this is a much more honest and consistent manner in which to view these reports, and it certainly leads to a lot less head-scratching and guessing. It certainly allows us to ignore all the disingenuous market reports that we read trying to develop a causal relationship between news and market moves. Always keep in mind the old adage that "news falls within the cycles."

Now, if you have been reading me of late, you would know I was expecting a substantial bottom to be struck in early October, which would likely set up a rally into the end of October or early November. And, as we stand now, we have rallied just about 15% off the low struck on October 13. I do not think we are yet done. Yet, it is also reasonable to expect a pullback to be seen over the next week or so.

Therefore, to make this rather easy, support in the market is between 3700-3800SPX. As long as the next pullback is corrective, and holds that support, then my next upside target is going to be the 4300SPX region.

What I am not yet sure about is if the market begins that pullback below 4020SPX, or if we have to rally to the 4118-4154SPX region before that pullback begins. So, the upcoming week will provide us with that answer, with a sustained break of 3895SPX providing us with our indication that the pullback is well underway.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of, a live trading room featuring his analysis on the S&P 500, precious metals, oil, and USD, plus a team of analysts covering a range of other markets.