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Danger, Will Robinson!!

Pure play stocks usually trade in near-perfect unison with their related industry index. Oil stocks are one of the best examples. Except for rare occasions like market crashes, if oil is up, oil stocks are up. Bada bing, bada boom.

I often hear someone wonder how XOM (Exxon Mobil) rose $3 a share when “the market” was going down yesterday/last week/whatever.

I point out to them that oil gained, say, $6 a barrel over the same time period, and that’s why XOM rose as well. Oil up, Exxon up. Wax on, wax off. Don’t take a long-term short position in Exxon with oil in a sustained uptrend. To quote my 13 year-old.. DUH!

So what’s my point? It’s this: what if a pure-play stock and its related index suddenly start going in opposite directions? That’s a phenomenon known as divergence, and it always deserves your strict attention.

Some of my friends have made a buttload of money over the last few months trading a little Bulletin Board Canadian stock called Canwest Petroleum, or CWPC. Or CWPC.OB. Or BB:CWPC. Depends on your quote system.

As oil rose from $50/bbl to $75/bbl, Canwest rose from under $1/share to over $8/share. Sweeet!! (vs. crude, I suppose)

However, over the last few days, CWPC has diverged greatly from its sector. And in the bad direction. I hope my friends have noticed this.

I’ve concocted a chart overlaying the prices of the XOI, XOM and CWPC. The charts are scaled to fit over each other so you can see the relative movement.

Here’s my little chart up to a few days ago:

See any similarities?

Now look at the same chart extended thru last night:

Notice how XOM has obediently tracked right on up with the price of oil and the XOI. And notice what’s happened with CWPC. Ladies and gentlemen, something smells funny!!

Now, we see a clear case of divergence here. What can we divine from it? Here are some possibilities:

• Possibility One: The price of CWPC has been suppressed by insiders for accumulation reasons the last two weeks. That’s entirely possible with a little, foreign, BB stock. If this is what’s going on, CWPC is due for a huge move to the upside. If any of my friends neglected their stops and are still hung up in the stock, for them I hope this is the case.

  If this is the case, the chart will reveal when the operators are done, and it’ll be time to look to get long.

  I must say, if anyone asked me me to put my kids’ college money into Canwest right now, I’d be disinclined to acquiesce.

• Possibility Two: Someone knows something, and the stock has decoupled from the oil market because it is sick. It takes a Ken Lay to build a facade as huge as Enron. A small, creative team working out of the CEO’s basement could pull it off with a Bulletin Board stock.

  If the rug has been pulled out from under this stock, we’ll start hearing the “news” after all the large shareholders are out, and after the price is long gone. Fortunately, anyone watching their charts and minding their stops will be out well before then. Are already out, actually.

Me? What am I gonna do? Well, I’ll keep an eye on it, and if The Chart shows me a break to the upside, I’ll be all over this puppy like stink on hot guts. Otherwise, I’ve got dishes to wash.

If you’re in this stock, write down on an index card where your stop is, and carry that card around with you. Refer to it often, trail it up if given the opportunity. If CWPC goes to $10 over the next month, you’ll be on board for the ride. If it heads downhill like a runaway train, you will have stepped off back up the mountain somewhere, and will be safely standing beside the track and watching it fade away.