Stock Quotes in this Article: BIG, PBY, PLAB, P, MFRM

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.

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

Pep Boys-Manny, Moe & Jack

My first earnings short-squeeze trade idea is Pep Boys-Manny, Joe & Jack (PBY), which is set to release numbers on Monday after the market close. This company is engaged mainly in automotive repair and maintenance and in the sale of automotive tires, parts and accessories through a chain of stores. Wall Street analysts, on average, expect Pep Boys-Manny, Moe & Jack to report revenue of $527.68 million on earnings of 15 cents per share.

If you're looking for a heavily-shorted stock that's trending up decent head into its report, then make sure to check out shares of Pep Boys-Manny, Moe & Jack. This stock has risen by 15% during the last three months.

The current short interest as a percentage of the float for Pep Boys-Manny, Moe & Jack is rather high at 12.8%. That means that out of the 50.80 million shares in the tradable float, 6.48 million shares are sold short by the bears. This is more than enough shorts in stock with a relatively low float. Any bullish earnings news could easily spark a solid short-covering rally post-earnings.

From a technical perspective, PBY 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 strong for the last four months, with shares moving from a low of $8.70 to a recent high of $10.95 a share. During that uptrend, shares of PBY have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed PBY within range of triggering a major breakout trade post-earnings.

If you're bullish on PBY, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some key overhead resistance levels at $10.95 to $11.86 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 538,505 shares. If that breakout hits, then PBY will set up to re-fill some of its previous gap down zone from May that started near $15 a share.

I would simply avoid PBY 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 $10.22 a share with heavy volume. If we get that move, then PBY will set up to re-test or possibly take out its next major support levels at $9.85 to $9.48 a share. Any move below $9.48 could send PBY down towards $9 a share or lower post-earnings.

Big Lots

Another potential earnings short-squeeze play is Big Lots (BIG), which is set to release its numbers on Tuesday before the market open. This company operates as a broadline closeout retailer in the U.S. Wall Street analysts, on average, expect Big Lots to report revenue of $1.14 billion on a loss of 24 cents per share.

If you're looking for a heavily-shorted stock that's been beaten-down by the bears heading into its quarter, then make sure to take a strong look at shares of Big Lots. This stock has been hammered by the sellers so far in 2012, with shares down by 26%.

The current short interest as a percentage of the float for Big Lots is pretty high at 11.9%. That means that out of the 50.08 million shares in the tradable float, 6.94 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of BIG could explode higher post-earnings.

From a technical perspective, BIG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months, with shares plunging from a high of $39.23 to its recent low of $26.69 a share. During that downtrend, shares of BIG have been mostly making lower highs and lower lows, which is bearish technical price action. That said, the stock has recently rebounded off that low of $26.69 a share and its quickly moving within range of a near-term breakout trade.

If you're in the bull camp on BIG, 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 $28.53 to its 50-day at $29.33 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,144,500 shares. If that breakout triggers hits, then BIG will set up to re-test or possibly take out its next major overhead resistance levels at $31.72 to $31.90 a share. Any high-volume move above $31.90 will then give BIG a chance to re-fill some of its gap down zone from August that started near $39 a share.

I would simply avoid BIG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some major near-term support at $26.69 a share with heavy volume. If we get that action, then BIG will set up to enter new 52-week low territory, which is bearish technical price action.

Mattress Firm

One potential earnings short-squeeze candidate is Mattress Firm (MFRM), which is set to release numbers on Tuesday after the market close. This company is a specialty retailer of mattresses and related products and accessories in the U.S. Wall Street analysts, on average, expect Mattress Firm to report revenue of $271.59 million on earnings of 46 cents per share.

Just recently, and after meeting with management, Piper Jaffray reiterated an overweight rating on MFRM and called the stock one of its favorite investment ideas for the next 12 months. Piper believes the current risk/reward on shares significantly favors the upside over the next 12 months.

The current short interest as a percentage of the float for Mattress Firm is extremely high at 29.7%. That means that out of the 13.34 million shares in the tradable float, 3.93 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 69,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a huge short-squeeze develop post-earnings.

From a technical perspective, MFRM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last two months, with shares dropping from a high of $33.80 to its recent low of $25.88 a share. During that downtrend, shares of MFRM have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of MFRM have started to rebound off that low of $25.88 and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on MFRM, 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 at its 50-day moving average of $30.19 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 300,710 shares. If that breakout hits, then MFRM will set up to re-test or possibly take out its next major overhead resistance levels at $32.53 to $33.97 a share. Any high-volume move above $33.97 will then put $38 to $40 into focus for shares of MFRM.

I would avoid MFRM 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 $27 to $25.88 a share with high volume. If we get that action, then MFRM will set up to re-test or possibly take out its next major support level at $22.82 a share.

Pandora Media

Another earnings short-squeeze trade idea is Pandora Media (P), which is set to release numbers on Tuesday after the market close. This company provides internet radio services in U.S. Wall Street analysts, on average, expect Pandora Media to report revenue of $117.07 million on earnings of 1 cent per share.

If you're looking for a heavily-shorted stock that's been beaten-down by the bears heading into its quarter, then make sure to check out shares of Pandora Media. This stock has been hit hard by the bears during the last three months, with shares off by 26%.

The current short interest as a percentage of the float for Pandora Media is extremely high at 31.3%. That means that out of the 109.95 million shares in the tradable float, 34.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.5%, or by about 510,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, P is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months, with shares plunging from a high of $12.57 to its recent low of $7.08 a share. During that downtrend, shares of P have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of P have recently rebounded sharply off that $7.08 low and the stock is quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on P, 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 $9.02 to $9.11 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 4,981,850 shares. If that breakout hits, then P will set up to re-test or possibly take out its next major overhead resistance level at $10.04 to $10.10 a share. If those levels get taken out with volume, then P will have a chance to trade above $11 a share post-earnings.

I would avoid P 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 at $8.50 to $8 a share with heavy volume. If we get that action, then P will set up to re-test or possibly take out its next major support levels at $7.50 to $7.08 a share. Any move below $7.08 will then push P into new 52-week low territory, which is bearish technical price action.

Photronics

My final earnings short-squeeze play is Photronics (PLAB), which is set to release numbers on Tuesday after the market close. This company is a manufacturer of photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Wall Street analysts, on average, expect Photronics to report revenue of $121.83 million on earnings of 16 cents per share.

The current short interest as a percentage of the float for Photronics is rather high at 11.6%. That means that out of the 58.80 million shares in the tradable float, 6.86 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.7%, or by about 50,000 shares. If the bears are caught pressing their bets too aggressively into this quarter, then this stock could easily rip higher post-earnings.

From a technical perspective, PLAB is currently trending right above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been downtrending for the last six months, with shares dropping from over $6.60 to a recent low of $4.56 a share. During that downtrend, shares of PLAB have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of PLAB have recently rebounded off that low of $4.56 and its quickly moving within range of triggering a near-term breakout trade.

If you're in the bull camp on PLAB, then I would wait until after its report and look for long-biased trades as long as it's trending above its 50-day at $5.08, and then once it breaks out above $5.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 380,615 shares. If that breakout hits, then PLAB will set up to re-test or possibly take out its next major overhead resistance levels at $5.87 to $6.18 a share. Any high-volume move above $6.18 will then put $6.45 to $6.72 into focus for shares of PLAB.
I would simply avoid PLAB or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $4.94 a share with high volume. If we get that action, then PLAB will set up to re-test or possibly take out its next major support levels at $4.80 to $4.56 a share. Any move below $4.56 would then push PLAB into 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 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.