You need Watcom C 10.6 or later, or Open Watcom 1.0 or later. I used Open Watcom 1.9.
Install DJGPP (unfortunately). Allegro requires some of its parts for its compilation process. See the DOCS\BUILD\WATCOM.TXT file in the Allegro source code archive for details. Note: DJGPP Make crashed for me on FreeDOS, but not on Windows 98. Your mileage may vary.
In INCLUDE\ALLEGRO\PLATFORM\ALWATCOM.H, comment out line 36.
In DEMO\DISPLAY.H, comment out line 7 and put a typedef definition around the definition of enum ANIMATION_TYPE that follows.
Clear your WCC386, WCL386, and WPP386 variables or you might get the error "Arg list too long".
Execute: fix.bat watcom
Execute: make (DJGPP's Make, not Watcom's WMake)
You should now be able to compile Allegro applications. Note that Allegro requires them to be compiled with the options /s/3s.