EXPLANATIONS

*The lists you will find here are not personal buy or sell recommendations.  They are merely reports of stock activity and technical signals generated by a single specific discipline.  The fact that this particular system is used here does not imply that we consider it to be the best trading system.  We don't.  We believe other alert systems give more reliable signals.  However, this system is well-known and widely followed.  Its advantage is that while it more often "jumps the gun" on a move, it does tend to give an earlier "heads up."  That means its usefulness is enhanced if you learn not to jump just because a signal is generated.  An early signal can be a real plus if you learn to reject any stock as a purchase candidate if its "setup" isn't quite right.  The bottom line is that the earlier signal can allow you to enter the position earlier, but you have to be a little more careful.  Proper alignment is not in itself a sufficient reason to buy or sell a stock.  Look at the chart below, for example. 
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The moving averages aligned properly in the last few days charted (on December 18th).  The blue line is the 4-day moving average, the red line is the 9-day moving average, and the purple line is the 18-day moving average.  Notice the large price spikes that caused the signal.  These are white candlesticks.  They are followed by one more short white candlestick and then by a large black candlestick (the last bar) that undoes the work of the two preceding white bars.  At this point, we should be observers only.  Earlier, there had been sideways work done between $26 and $27, the lower boundary of which is marked by the horizontal black line just below 26.  This area will offer some resistance when the stock rises.  Another area of possible resistance/support is the straight black line terminating at about 23.24.  This is the trendline defining the downtrend.  At this time, only very short-term traders should even think about it as a purchase candidate.  Lateral work (not shown) was done between $22 and $22.75 (and later between $21.25 and $22).  All of this suggests there may be some support around $22.  The 50-day moving average is at $22.71 and the 9-day average is just above $22.  If the stock is going to be worthwhile, it should stop its decline before it reaches half way into the first large white candlestick.  Once again, that is at about $22.  All of these levels, taken together, should give you an idea about where the stock can be expected to get support.  If that doesn't happen, the wise investor will simply walk away.  The foregoing notwithstanding, we are not very positive about the stock on a long-term basis...yet.  Observe that the downward sloping trendline drawn through significant tops is still in control (the closing price is below it).  This line acts as overhead resistance, and it is still declining and exerting downward influence on the stock.  The 50-day moving average has not yet shown any signs of turning around.  You want it to be at least flat if not rising, but it is still declining.  Our guess is that this stock may have to do a little more work and build a base before it is ready to embark on a significant uptrend.  However, nimble traders can still make a nice profit on it by capturing surges.  These traders are the ones who will look for support at about $22  After all, a $4 gain on a $22 stock is a gain of more than 18% (not bad for a few weeks).  Longer term investors should require more convincing.  As you can see, a stock can have the correct alignment of moving averages for a purchase but the pattern itself may still not be "ready' or it may even be lousy.  By scanning the output of this and our other alert systems (see our StockAlerts publication), we can focus our attention on a few hundred rather than on a few thousand stocks.  Our various alert disciplines in StockAlerts help us to screen out thousands of stocks that are not "candidates" at this time.  If you intend to trade this system, please see "Trading This System" lower on this page.  There is a lesson on triple moving average crossover systems in our "Free Tutorials" (see the link on the navigation bar). 

While Allen's discipline is a popular trading system in its own right, the trading members of our company prefer to use it as only one of their screening tools.  That is, its output notifies us of the recent emergence of certain technical conditions that make a stock interesting and a candidate for a closer look.  We conduct further evaluation and analysis to determine if any of these stocks should be included on our "Watch List." 

In general, we watch for a setup, the absence of significant overhead resistance, and a "trigger event."  The setup might be a stock that has been declining but has recently touched its rising 50-day moving average.  The trigger event might be when it rebounds off of the 50-day moving average or rebounds and then shows a little follow-through price activity (preferably on increased volume).  Another example of a setup might be a Bollinger Band "squeeze" that has lasted for awhile (the tighter and longer the squeeze, the better).  A Bollinger "squeeze" results when volatility has been low.  Periods of low volatility often precede a significant price surge.  The trigger might be a price surge on increasing volume that lifts the stock above its upper Bollinger Band.  For more information on the Bollinger Band squeeze, please click on "StockAlerts" on the navigation bar and read the explanation you will find there.

With regard to this particular screen, a proper setup may exist if a stock is qualified to be listed on this page and if there is no reason to be apprehensive about the chart pattern.  If there is overhead resistance immediately above the current price, there is reason to be apprehensive.  If there is no resistance there, the trigger event might be a follow-through price surge on increasing volume.  If the resistance is there, we might still consider it to be a "setup" but modify the trigger event.  For example, we might consider an acceptable trigger event to be a follow-through price surge on increasing volume that takes the stock through that resistance.  Some experienced traders would then wait for a subsequent test of support at the previous level of resistance and then a resumption of the up-trend. 

Instead of using Allen's system to define the setup, some use it to define the trigger event.  In that case, the trader would look for good setups (a Bollinger squeeze with penetration of upper band, for example).  These setups would have a context that is attractive (they would avoid poor pattern formations and situations where there is overhead resistance just above the current price).  Then, they would wait for this discipline to give the final go-ahead.  (Note: A discussion of the meaning of "support" and "resistance" can be found by clicking on "Free Tutorials" on the navigation bar and scrolling down to the section titled "Charts."  Read all of that section.)

StockAlerts focuses on twelve very important alert systems and lists of stocks that have triggered one of these alerts are posted for subscribers every week.  The Valuator also provides watch-list candidates.  Those publications have many more "Watch-List" candidates than you will find here (The Valuator, for example, can be ranked in each of 7 columns (best PE, best PEG, best Value, greatest Strength, and so on).  The "Strength" algorithm alone in The Valuator provides a wonderful list of potential candidates.  It is far mor powerful than the simplistic RSI (Relative Strength) used at most Web sites.  Each measurement can be ranked and the top 50 or 100 out of about 500 stocks can be scanned for attractive setups and possible inclusion in a "watch list." 

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