Technically, you should sell Chesapeake Energy (NYSE: CHK) right now.

We examined the company using Moving Average Convergence-Divergence (MACD), 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.

Signal line crossover is one of the more common ways to interpret MACD. It 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 Chesapeake Energy's MACD profile:


Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! OK, we're jesting -- but in all seriousness, this is 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 18 times!

A better way to size up companies
Here at Fool.com we're more interested in other measures of company value. When we look at Chesapeake Energy and its peers, here are the areas that interest us:

Company

Chesapeake Energy

Apache Corp. (NYSE: APA)

Devon Energy Corp. (NYSE: DVN)

Market Cap (millions)

$13,898

$33,681

$27,101

Annual Revenue Growth

-37.46%

17.03%

-1.97%

Revenue (TTM, millions)

$8,844

$10,558

$8,863

Operating Margin (TTM)

15.62%

46.18%

43.53%

P/E (TTM)

21.06

12.07

11.75

Source: Capital IQ, a division of Standard and Poor's; TTM = trailing 12 months.

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 areas 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 Chesapeake Energy, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • Chesapeake offers one of the most diversified ways to gain access to natural gas. The company has properties across all the hottest natural gas opportunities. Chesapeake has lucrative reserves in the Haynesville Shale, the Marcellus Shale, the Eagle Ford Shale, and other areas. In total, the company closed out 2009 with over 13 trillion cubic feet equivalent (Tcfe) of proven natural gas reserves, not to mention its still undeveloped properties. With XTO now acquired by ExxonMobil, Chesapeake's as big as they come for investors looking to invest in independent natural gas companies.

  • One of the major questions surrounding the company is corporate governance. CEO Aubrey McClendon got into trouble for buying company stock on margin. In addition, the board of directors' approval of buying McClendon's art collection for $12.1 million raised some eyebrows. While there's little doubt McClendon knows the natural gas industry like few other people on the planet, past actions have struck some investors as self-serving or reckless.

  • In the end, Chesapeake offers some of the lowest all-in costs for natural gas in the industry. Even with some debt on the balance sheet, Chesapeake should be well-situated even if natural gas prices come back to their industrywide marginal cost of production in the near term.

Want to sell Chesapeake Energy based on technical merits today? Technically, odds are that you should flip and buy Chesapeake Energy sometime very soon. If that sounds like madness to you, well, we here at the Fool.com 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 toward 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. However attractive, this theory 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 as much as 75% of market trading now done by Ph.D-level programmers at massive high-frequency funds, even if opportunities existed, what chance would 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 Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: Chesapeake Energy crossed the crossover 18 times across the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating 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 why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Chesapeake Energy looks like a sell right now.

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Jeremy Phillips owns shares of no companies listed above. Chesapeake Energy is a Motley Fool Inside Value choice. The Fool owns shares of Chesapeake Energy and Devon Energy. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.