Technically, you should sell Penn West Energy Trust (NYSE: PWE) 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 Penn West Energy Trust's MACD profile:


Confused? Well, that's preposterous! How could you ever be confused by something as simple as a moving average convergence-divergence chart! OK, we jest -- 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 22 times in one year.

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 Penn West Energy Trust and its peers, here are the areas that interest us:

       

Company

Penn West Energy Trust

EnCana (NYSE: ECA)

Suncor Energy (NYSE: SU)

Market Cap (billions)

$8.8

$19.6

$47.3

Quarterly Revenue Growth (yoy)

0.5%

(40%)

88.4%

Revenue (TTM, billions)

$2.4

$10.0

$30.0

Operating Margin (TTM)

(1.8%)

23.9%

8.6%

P/E (TTM)

32.5

12.2

18.8

PEG (5-year expected)

N/A

1.7

0.7

Source: Yahoo! Finance and 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 Penn West Energy Trust, don't evaluate it for crossing a momentum line. Buy or sell it because Penn West investors are soaking in the dividends: The company yields 8.8%. Penn West is a Canadian royalty trust, which means it gains certain tax advantages for paying out high income (dividends) to shareholders.
  • Foolish colleague Chris Barker describes Penn West as the nucleus of his long-term energy exposure. He considers the company's scale, well-diversified asset base, and track record of growth to be reasons to buy the company.
  • However, the gravy train for Canadian royalty trusts will end soon. Starting in 2011, they'll be taxed just like normal corporations, which is causing Penn West and other companies in the industry to convert to good old-fashioned corporations in the coming years. While Penn West will experience higher tax rates, the move will allow the company to have more flexibility in pursuing a capital structure that can balance dividend payouts and growth.

Want to sell Penn West Energy Trust based on technical merits today? Technically, odds are that you should flip and buy Penn West Energy Trust sometime very soon. If that sounds like madness to you, well, we here at 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: Penn West Energy Trust crossed the crossover 22 times in 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.

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 Penn West Energy Trust looks like a sell right now. Just don't expect to hold it for very long.

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Jeremy Phillips doesn't own shares of companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.