We examined Level 3 Communications (Nasdaq: LVLT) using moving average convergence-divergence, which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of Level 3 Communications' MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a moving average convergence-divergence chart?! While I jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 20 times!

Want to buy Level 3 Communications today? Technically, odds are that you should flip and sell Level 3 Communications sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time most technical analysis schemes are a relatively simple science: eliminating the vast complexities of evaluating true company value. It's an attractive theory, but one that is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with up to 75% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries that showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what I mentioned earlier: Level 3 Communications crossed the crossover 20 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's the antithesis of what we preach at Fool.com. When we look at Level 3 Communications and its peers, here are the areas that interest us:

 

Level 3 Communications

Cogent Communications (Nasdaq: CCOI)

Qwest Communications (NYSE: Q)

Market Cap

$1.8 billion

$386.7 million

$9.8 billion

Quarter YOY Sales Growth

(7.1%)

14%

(6.5%)

Revenue

$3.7 billion

$243.5 million

$12.1 billion

Operating Margin

(3%)

1.2%

17%

P/E

N/A

N/A

19.9

PEG (5-Year Expected)

N/A

N/A

3.33

Source: Yahoo! Finance. YOY = year over year.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Level 3 Communications, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • You believe that the nation will require faster broadband as data consumption grows throughout the next decade. Level 3 owns massive amounts of long-haul fiber optic networks that could be a tremendously valuable asset as data growth continues. Cisco projects that in 2014 IP traffic will over increased over its 2008 levels by 10-fold. That puts a tremendous amount of pressure on America's existing broadband infrastructure and provides a strong push to start utilizing fiber lines to help transmit booming Internet traffic needs. Level 3 is not alone in this endeavor, however; other large telecoms like Qwest also provide large fiber networks. So investors could decide between several options if looking to invest in this opportunity.
  • Despite already significant data traffic growth, Level 3 hasn't been able to cash in on its network, and its time is running short. The company has just $442 million in cash equivalents versus $6.2 billion in long-term debt. Also, large slugs of debt have maturities across 2013 and 2014. If the company can't prove the value of its long-haul fiber optic network by then, it will face some serious struggles.
  • Level 3 has gotten more active in providing content delivery services. While this area has provided Akamai shareholders with great returns recently, it's also a fiercely competitive landscape.

These are the factors that will drive Level 3's long-term wealth. Best of all, establishing a portfolio of well-managed companies with strong advantages over their competitors spares you having to sit bleary-eyed in front of a computer buying in and out of companies with a Big Gulp full of coffee. That's the kind of future I'm looking for. Although, if your idea of protecting your future is charting the ups and downs of moving average convergence-divergence charts, then have at it.

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Jeremy Phillips owns shares of no companies listed above. Akamai Technologies is a Motley Fool Rule Breakersrecommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.