Stock Quotes in this Article: DKS, DWCH, GMCR, URBN, LEJU

DELAFIELD, Wis. (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 Wall 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.

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Datawatch

My first earnings short-squeeze trade idea is business computer software products player Datawatch (DWCH), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Datawatch to report revenue of $10.17 million on a loss of 19 cents per share.

 

The current short interest as a percentage of the float for Datawatch is very high at 13%. That means that out of the 7.98 million shares in the tradable float, 1.04 million shares are sold short by the bears. This stock sports a low float and a high short interest. Any bullish earnings news could easily spark a large short-covering rally for shares of DWCH post-earnings.

 

From a technical perspective, DWCH is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last month, with shares moving higher from its low of $8.64 to its recent high of $11.25 a share. During that uptrend, shares of DWCH have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DWCH within range of triggering a near-term breakout trade post-earnings.

 

If you're bullish on DWCH, 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 at $11.25 to $12 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 74,531 shares. If that breakout triggers post-earnings, then DWCH will set up to re-test or possibly take out its next major overhead resistance levels at $13.31 to $13.50 a share, or even $14.25 to $14.50 a share.

 

I would simply avoid DWCH or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at its 50-day moving average of $10.46 a share to more support at $10.33 to $10.13 a share with high volume. If we get that move, then DWCH will set up to re-test or possibly take out its next major support level at its 52-week low of $8.64 a share.

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Dick's Sporting Goods

 

Another potential earnings short-squeeze play is sporting goods store operator Dick's Sporting Goods (DKS), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Dick's Sporting Goods to report revenue $1.53 billion on earnings of 41 cents per share.

 

The current short interest as a percentage of the float for Dicks Sporting Goods is notable at 4.6%. That means that out of the 94.65 million shares in the tradable float, 4.42 million shares are sold short by the bears. If the bulls can get the earnings news they're looking for, then shares of DKS could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

 

From a technical perspective, DKS is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last month, with shares moving higher from its low of $41.56 to its recent high of $48.96 a share. During that move, shares of DKS have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DKS within range of triggering a major breakout trade post-earnings.

 

If you're in the bull camp on DKS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance at $48.96 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.54 million shares. If that breakout starts post-earnings, then DKS will set up to re-fill some of its previous gap-down-day zone from May that started at $53 a share. Any high-volume move above $53 will then give DKS a chance to tag $56 to $57 a share, or even $58 a share.

 

I would simply avoid DKS 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 $47 to around $46 a share with high volume. If we get that move, then DKS will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $44.85 to $43 a share, or its 52-week low at $41.30 a share.

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Leju

 

Another potential earnings short-squeeze candidate is China-based online-to-offline real estate services player Leju (LEJU), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Leju to report revenue of $132.56 million on earnings of 22 cents per share.

 

The current short interest as a percentage of the float for Leju is extremely high at 22.1%. That means that out of the 16.02 million shares in the tradable float, 3.54 million shares are sold short by the bears. This stock currently sports a low tradable float and a very high short interest. Any bullish earnings news could easily send shares of LEJU soaring sharply higher post-earnings as the bears rush to cover some of their bets.

 

From a technical perspective, LEJU is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $11.85 to its recent high of $16.14 a share. During that uptrend, shares of LEJU have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LEJU within range of triggering a near-term breakout trade post-earnings.

 

If you're bullish on LEJU, 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 $15.64 to $16.14 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 706,617 shares. If that breakout develops post-earnings, then LEJU will set up to re-test or possibly take out its all-time high of $18.60 a share. Any high-volume move above $18.60 will then give LEJU a chance to tag or trend north of $20 a share.

 

I would avoid LEJU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $13.70 a share with high volume. If we get that move, then LEJU will set up to re-test or possibly take out its next major support levels at $12 to $11 a share.

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Keurig Green Mountain

 

Another earnings short-squeeze prospect is specialty coffee and coffeemaker player Keurig Green Mountain (GMCR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Keurig Green Mountain to report revenue of $1.16 billion on earnings of 77 cents per share.

 

The current short interest as a percentage of the float for Keurig Green Mountain stands at 5%. That means that out of 120.72 million shares in the tradable float, 6.25 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the earnings news they're looking for.

 

From a technical perspective, GMCR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last three months and change, with shares moving higher from its low of $112.55 to its recent high of $156.92 a share. During that uptrend, shares of GMCR have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GMCR within range of triggering a big breakout trade post-earnings.

 

If you're bullish on GMCR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $156.92 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that registers near or above its three-month average action of 1.58 million shares. If that breakout materializes post-earnings, then GMCR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $180 to $190 a share.

 

I would simply avoid GMCR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $150 to $145 a share with high volume. If we get that move, then GMCR will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $140.74 to $135.36 a share, or even $130 to $127 a share.

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Urban Outfitters

 

My final earnings short-squeeze play is lifestyle specialty retailer Urban Outfitters (URBN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Urban Outfitters to report revenue of $813.05 million on earnings of 41 cents per share.

 

The current short interest as a percentage of the float for Urban Outfitters is extremely high at 5.5%. That means that out of the 100.92 million shares in the tradable float, 7.36 million shares are sold short by the bears. This is far from a huge short interest, but it's more than enough to spark a decent short-squeeze post-earnings if Urban Outfitters can deliver a strong quarter and give the bulls the earnings news they're looking for.

 

From a technical perspective, URBN is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down sharply lower from around $35 to $29.11 a share with heavy downside volume. Following that move, shares of URBN have started to rebound and uptrend a bit, with the stock moving higher from $29.11 to its recent high of $31.88 a share. That rebound has now pushed shares of URBN within range of triggering a near-term breakout trade post-earnings.

 

If you're in the bull camp on URBN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $31.88 to $32.19 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.36 million shares. If that breakout develops post-earnings, then URBN will set up to re-fill its previous gap-down-day zone from October that started near $35 a share. Any high-volume move above its 200-day moving average at $35.36 will then give URBN a chance to tag $37 to $39 a share, or even $40 a share.

 

I would avoid URBN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $29.53 to its 52-week low of $29.11 a share with volume. If we get that move, then URBN will set up to enter new 52-week-low territory, which is bearish technical price action.

 

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

 

-- Written by Roberto Pedone in Delafield, Wis.

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


Roberto Pedone, based out of Delafield, Wis., 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.