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Historical Pattern Recognition
 As
traders and investors we continuously strive to hone our pattern recognition
skills so that we can discriminate true trends from 'head fakes,' separate
fundamentals from 'funny mentals,' and generally decipher fact from fiction.
Since much of America stayed home from work and school this past week in
celebration of Columbus Day, we thought it might prove instructive to use this
felicitous occasion as a case study in the practiced art of discernment.
After all, it is important that we traders and investors learn to understand
what we are seeing before our very eyes. The way we do this is by becoming
familiar with what has happened before; for this is the very essence of pattern
recognition.
Patterns stored in our heads are recalled and compared to what we are seeing on
our charts, right now. Without a well stocked storehouse of past recognized
patterns, our synapses would have no way of evaluating future patterns as they
emerge.
But isn't this equally true in all areas of life? For example, many well
recognizable political patterns are currently repeating themselves all over the
world. If we think of them as candlesticks leaving a trail of historical 'price'
activity across eras of time, with each candle representing the open, high, low
and close of the price of freedom over a one year period, we see many clear down
trends, a few up trends, numerous sideways patterns and a large number of
violent channel breakouts.
A good technical and historical analyst can easily project such patterns into
the future. After all, they've been repeating themselves with remarkable
regularity for at least 10,000 years.
Currently on our charts we see that the 'war on terrorism' MACD is strongly
oversold, while the 'give me security' stochastic remains grossly overbought and
rising. Our charts call for at least a 50% Fibonacci retracement of overstepped
governmental bounds, but there aren't enough buyers to take the other side of
the position.
To spot these patterns, all you need do is to look around you. But how will you
recognize them and what will you compare them to, historically speaking, that
is, if there are blank spaces in your technical indicator tool chest where past
patterns should have been stored?
Here is a pattern you'll probably recognize. It's been stored in your long-term
memory since you were a young school child. We're speaking of the story of
Christoforo Colon, known to most as Christopher Columbus.
As a boy enrolled in the 6th grade in the Andover, Massachusetts public school
system, certified educators -- and, to me as a young child, respected authority
figures -- instructed your young author to memorize that 'in fourteen hundred
and ninety-two, Columbus sailed the ocean blue.'
I was taught that without the heroic efforts of this great pioneer, we might not
have the free country we live in today.
The legendary explorer was said to be a great and honorable man, a pious
Christian who faced tremendous odds to set sail across the uncharted Atlantic in
the Nina, the Pinta and the Santa Maria to discover the New World. In addition
to the ever present threats of scurvy, beri beri and rickets, he faced a crew
that nearly became mutinous for fear they would sail right off the edge of the
Earth.
* But is this true?
* Or just some of it?
* Are there parts that have been left out?
* If so, why?
Let's skip right over the fact that Mr. Columbus spent the decade prior to his
famous voyage as a 'slaver' (captain of a slave ship), running kidnapped
Africans back to Portugal.
Let's also skip over the fact that numerous
Irish, Scandinavian and other European explorers discovered America hundreds of
years earlier (Viking runes predating Columbus by over 1,000 years have been
found as far inland as Minnesota) and jump right to an epic work titled
A People's History of the United States by world acclaimed historian and
author Howard Zinn who has the following to say about Christopher
Columbus upon making landfall in the Bahamas on October 12, 1492.
'Arawak men and women, naked, tawny, and full of wonder, emerged from their
villages onto the island's beaches and swam out to get a closer look at the
strange big boat. When Columbus and his sailors came ashore, carrying swords,
speaking oddly, the Arawaks ran to greet them, brought them food, water, gifts.'
What did Columbus himself think of these friendly, innocent people? He wrote the
following in his personal log which still survives today:
"They [Arawaks]... do not bear arms, and do not know them, for I showed them
a sword, they took it by the edge and cut themselves out of ignorance. They have
no iron. Their spears are made of cane.... They would make fine servants....
With fifty men we could subjugate them all and make them do whatever we want."
Hmmm...
'Make fine servants?'
'Make them do whatever we want?'
Where is Columbus going here?
The great man continues in his log:
"As soon as I arrived in the Indies, on the first Island which I found, I
took some of the natives by force in order that they might learn and might give
me information of whatever there is in these parts..."
'Took some of the natives by force?'
Is this the Dashing Christian Explorer we met in grade school?
Professor Zinn adds:
"Now, from his base on Haiti, Columbus sent expedition after expedition into
the interior. They found no gold fields, but had to fill up the ships returning
to Spain with some kind of dividend. In the year 1495, they went on a great
slave raid, rounded up fifteen hundred Arawak men, women, and children, put them
in pens guarded by Spaniards and dogs, then picked the five hundred best
specimens to load onto ships. Of those five hundred, two hundred died en route.
The rest arrived alive in Spain and were put up for sale by the archdeacon of
the town...
"But too many of the slaves died in captivity. And so Columbus, desperate to pay
back dividends to those who had invested, had to make good his promise to fill
the ships with gold. In the province of Cicao on Haiti, where he and his men
imagined huge gold fields to exist, they ordered all persons fourteen years or
older to collect a certain quantity of gold every three months. When they
brought it, they were given copper tokens to hang around their necks. Indians
found without a copper token had their hands cut off and bled to death.
"The Indians had been given an impossible task. The only gold around was bits of
dust garnered from the streams. So they fled, were hunted down with dogs, and
were killed. Trying to put together an army of resistance, the Arawaks faced
Spaniards who had armor, muskets, swords, horses. When the Spaniards took
prisoners they hanged them or burned them to death. Among the Arawaks, mass
suicides began, with cassava poison. Infants were killed to save them from the
Spaniards. In two years, through murder, mutilation, or suicide, half of the
250,000 Indians on Haiti were dead."
For the rest of this chapter in Zinn's powerful work
click
here.
At this point, Dear Reader, we will tiptoe back gingerly from the precipice of
credulity and leave you to draw your own judgments about Mr. Columbus. Suffice
it to say that, for some of you, the above will likely come as a shock.
But don't feel too bad. To the diligent student of real history, there's a lot
more shock where that came from.
As the late Carl Sagan once observed, "One of the saddest lessons of
history is this: If we've been bamboozled long enough, we tend to reject any
evidence of the bamboozle. We're no longer interested in finding out the truth.
The bamboozle has captured us. It is simply too painful to acknowledge -- even
to ourselves -- that we've been so credulous."
We at The Institute Of Higher Earning have learned that obfuscation of actual
history is a pattern worth recognizing, which is why we never read history books
written by the winners.
Another really terrific pattern to learn how to recognize is history being
rewritten RIGHT BEFORE YOUR VERY EYES, in the here and now. That takes a little
more practice.
However, being able to discern political fact from fiction enables us to draw
cultural trend lines and anticipate where to place appropriate social upheaval
and economic reversal stops.
So when we spot a severe downside channel breakout as the perpetual 'war on
terrorism' candle pierces the lower Bollinger Band, the Dow rises to an all-time
high on weak volume in the face of declining economic support and the citizen
apathy MACD plummets below the zero line, we stop and ask ourselves...
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