Stock Quotes in this Article: BSFT, FOSL, MAKO, QUAD, THC

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

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This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.

That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

BroadSoft

My first earnings short-squeeze trade idea is BroadSoft (BSFT), which is set to release numbers on Monday after the market close. This company is a global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. Wall Street analysts, on average, expect BroadSoft to report revenue of $41.53 million on earnings of 32 cents per share.

This stock has been trending strongly so far in 2012, with shares up over 20%. Just recently, Oppenheimer upgraded this stock from perform to outperform and changed its price target to $44 per share.

From a technical perspective, BSFT is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last three months, with shares moving between $34.42 on the downside and $42.96 on the upside. A move outside of that range post-earnings will likely set up the next major trend for BSFT

If you're bullish on BSFT, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance levels at $39.59 to $42.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 718,819 shares. If we get that breakout, then look for BSFT to re-test or possibly take out its next major overhead resistance levels at $47.44 to $55.45 a share.

I would simply avoid BSFT or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below $34.42 and its 200-day moving average of $33.97 with high volume. If we get that action, then BSFT will set up to re-fill its previous gap that started near $28 a share.

Fossil

Another potential earnings short-squeeze trade is Fossil (FOSL), which is set to release its numbers on Tuesday before the market open. This is a global design, marketing and distribution company that specializes in consumer fashion accessories. Wall Street analysts, on average, expect Fossil to report revenue of $713.10 million on earnings of $1.16 per share.

During the second quarter, this company saw its profit rise by 11.6% to $57.3 million from $51.4 million the year earlier, beating Wall Street estimates. Revenue jumped 14.3% to $636.1 million from $556.7 million. Fossil is looking to extend its streak of income increases to four straight quarters this earnings period. Net income spiked 22% in the fourth quarter of the last fiscal year and 4.2% in the first quarter.

The current short interest as a percentage of the float for Fossil is notable at 5.8%. That means that out of the 53.71 million shares in the tradable float, 3.12 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering really post-earnings if Fossil can produce solid results and bullish guidance.

From a technical perspective, FOSL is currently trading above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last three months, with shares moving between $81.90 on the downside and $96.40 on the upside. A move outside of that range post-earnings will likely set up the next major trend for FOSL.

If you're in the bull camp on FOSL, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some near-term overhead resistance at $96.40 share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,065,740 shares. If that breakout triggers, then FOSL will set up to re-fill some of its previous gap down zone from May that started near $125 a share.

I would simply avoid FOSL or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below some near-term support at $92.50 a share with high volume. If we get that action, then look for FOSL to set up to re-test or possibly take out its 50-day moving average of $87.31 a share.

Quad Graphics

One potential earnings short-squeeze play in the printing services complex is Quad Graphics (QUAD), which is set to release numbers on Tuesday after the market close. This company's print products primarily include catalogs, consumer magazines, special interest publications, direct marketing materials etc. Wall Street analysts, on average, expect Quad Graphics to report revenue of $1.05 billion on earnings of 64 cents per share.

This stock has been uptrending very strong in 2012, with shares up nicely by 28%. That move has pushed shares of Quad Graphics within two points of its 52-week high of $20.30 a share ahead of its earnings report.

The current short interest as a percentage of the float for Quad Graphics is huge at 32.6%. That means that out of the 22 million shares in the tradable float, 6.55 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.8%, or by about 116,000 shares. Any bullish earnings news for QUAD could set this stock on fire with a big short-squeeze post-earnings.

From a technical perspective, QUAD is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last five months, with shares soaring from a low of $11.45 to its recent high of $20.30 a share. During that uptrend, shares of QUAD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed QUAD within range of triggering a near-term breakout trade post-earnings.

If you're bullish on QUAD, then I would wait until after its report and look for long-biased trades if it can manage to break out above some key overhead resistance levels at $18.77 to $20.68 a share with high volume. Look for volume on that move that tracks in near or above its three-month average action of 157,033 shares. If QUAD triggers that breakout, then this stock could easily trend north of $25 to $30 a share post-earnings.

I would avoid QUAD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $18.35 to $17.58 a share with high volume. If we see that action, then QUAD will set up to re-test or possibly take out its next major support levels at $16.75 to $15.50 a share.

Tenet Healthcare

Another earnings short-squeeze trade candidate is Tenet Healthcare (THC), which is set to release numbers on Wednesday before the market open. This is an investor-owned health care services company whose subsidiaries and affiliates mainly operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Wall Street analysts, on average, expect Tenet Healthcare to report revenue of $2.24 billion on earnings of 34 cents per share.

This company has beaten Wall Street estimates for the last two quarters in a row and its coming off a quarter were it beat estimates by 20 cents, after reporting net income of 40 cents per share against a mean estimate of 20 cents per share. During the first quarter, Tenet Healthcare beat Wall Street estimates by 20 cents with net income of 52 cents per share versus a mean estimate of 32 cents per share.

The current short interest as a percentage of the float for Tenet Healthcare is rather high at 8.3%. That means that out of the 88.34 million shares in the tradable float, 8.50 million shares are sold short by the bears. If the bulls get the news they're looking for from THC, then we could easily see a sharp short-covering rally develop post-earnings.

From a technical perspective, THC is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strongly for the last three months, with shares surging from a low of $17.24 to its recent high of $26.96 a share. During that uptrend, shares of THC have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed THC within range of triggering a near-term breakout trade post-earnings.

If you're bullish on THC, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $25.60 to $26.96 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2,219,780 shares. If we get that breakout, then look for THC to re-test or possibly take out its next major overhead resistance levels at $28 to $30 a share.

I would avoid THC or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $23.46 to $22.86 a share with heavy volume. If we see that action, then THC will set up to re-test or possibly take out its 200-day moving average of $21.32 a share post-earnings.

Mako Surgical

My final earnings short-squeeze trade idea is Mako Surgical (MAKO), which is set to release numbers on Wednesday after the market close. This is a medical device company that markets its advanced robotic arm solution and orthopedic implants for orthopedic procedures. Wall Street analysts, on average, expect Mako Surgical to report revenue of $27.39 million on a loss of 16 cents per share.

Just this morning, Summer Street has upgraded this stock to buy from neutral with a $25 price target ahead of the company's third quarter results citing low expectations.

The current short interest as a percentage of the float for Mako Surgical is extremely high at 34.9%. That means that out of the 37.67 million shares in the tradable float, 13.05 million shares are sold short by the bears.

From a technical perspective, MAKO is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the last two months, shares of MAKO have been trending sideways between $14.18 on the downside and $19.62 on the upside. A high-volume move outside of that range post-earnings will likely set up the next major trend for MAKO.

If you're in the bull camp on MAKO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $16.28 to $16.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1,184,400 shares. If we get that breakout, then look for MAKO to re-test or possibly take out its recent high of $19.62 a share.

I would simply avoid MAKO or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some major near-term support at $14.18 a share with high volume. If we get that move, then MAKO could plunge lower towards its next major support levels $13 to $12 a share post-earnings.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.