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The pattern on the Boeing stock chart in Figure 3 shows such false alerts during both the December–January downmove and the February–March upmove. In the December 1997–January 1998 downmove, the first rally in December seemed like a potential alert. However, it did not qualify because the alert completed itself in only 10 price bars. The valid alert occurred on January 6, 1998, and the PTX signal registered on January 22, 1998.

During the January–February 1998 upmove, the initial February pullback took place fewer than 10 price bars after the rise of the solid line above the dotted line. The valid pullback alert completed on February 25, 1998, and a PTX was given on March 3, 1998.

THE BAR COUNT

The chart of Hutchinson seen in sidebar Figure 4 demonstrates how to verify the bar count suggested in rule 1. The profit alert pattern completes itself after the solid line has: 1 Been above/below the dotted line for 14 bars or more 2 Moved toward the dotted line 3 Resumed its original up or down direction.

During a pullback in an upmove, the alert pattern is complete the first time the solid line forms the valley with an increasing numeric value. In this example, the numeric value of the solid line began its decline on April 6, 1998, with a numeric value of 1.06, down from the 1.09 value the previous trading day.

The numeric value of the solid line continued to decline until it reached its ebb on April 9, 1998, at a value of 0.85. The next trading day (April 13, 1998), the solid line recorded a value of 0.89, the first upward numeric value since the decline began. The histogram at the top of the chart depicts the decline and registers its shortest bar on April 9, 1998. The next histogram bar is higher than the bar on April 9 and verifies the solid line value, which signals the completion of the alert pattern. That first higher bar (on April 13, 1998) is the zero point and the place to begin the bar count. A count of 14 bars or more above the dotted line suggests a potentially valid alert. The next downmove of the numeric value of the solid line represents the point at which to take full or partial profits.

In a downmove, the reverse is true. The alert pattern is complete when the solid line has been below the dotted line for 14 bars, has rallied up to the dotted line, peaked and resumed its original up or down direction.

FIGURE 1: HUTCHINSON. The alert in April at point A began as the MACD solid line dipped toward the dotted line without penetrating it. The alert completed itself on the close of April 13, 1998, the day after the solid line had bottomed and began to move higher. The signal to take full or partial profits occurred on April 22, 1998, the first time that the solid line closed down to form the profit-taking exit (PTX). During the May-June downmove, an alert was completed on June 10, 1998 (point A), after the solid line had been below the dotted line, moved up toward the dotted line, and then turned down. The PTX signal took place on June 19 as price was beginning a countertrend rally.

FIGURE 2: CAMBRIDGE HEART. Even though the alerts worked well with Cambridge Heart, the total price range was too small to make a profit. Stocks that trade above $20 usually produce better profits.

FIGURE 3: BOEING. Boeing illustrates both false and valid alerts. The December 1997 move of the solid line toward the dotted produced a false alert because there were fewer than 10 price bars at the conclusion of the potential alert. The valid alert did not take place until January 1998. The February 10th alert proved false because it violated both rules 1 and 2.

FIGURE 4: BOEING. The MACD histogram helps verify a bar count and clearly shows when the solid MACD line enters positive or negative territory. The histogram bars made it easy to count backward from the potential alert on December 19, 1997, and realize it was a false alert because it was only seven bars from the completion of the alert to the time the histogram went above its zero line. The histogram also helped identify the false alert on February 10, 1998, that completed in only 10 bars.

FIGURE 5: JUNE 1998 US DOLLAR. In addition to a valid bar count as specified in rule 1, the ideal profit alert pattern also shows a shortening of the histogram bars within the parameters discussed in rule 2 during pullbacks and rallies. The June US dollar illustrates both rules. The histogram bar contracted to 0.02 on April 30, 1998, plus it had a bar count greater than 14 on May 1, the day of the alert. And at the solid line pullback in June, the histogram bar contracted to 0.03 the day before the solid line began to rise. This created a valid alert on June 5. The earlier pullback in May met the criteria for rule 2, but did not meet the bar count needed to satisfy rule 1.