Stock Quotes in this Article: DDD, SODA, SPWR, RKUS, TRLA

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.

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.

3D Systems

My first earnings short-squeeze trade idea is three-dimensional (3D) printing player 3D Systems (DDD), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect 3D Systems to report revenue of $114.76 million on earnings of 24 cents per share.

Just this morning, Brean Capital initiated coverage on 3D Systems with a buy rating and $60 per share price target. The firm said 3D Systems' profits should grow at a 30% clip, partly driven by 20% revenue growth from its existing operations.

The current short interest as a percentage of the float for 3D Systems is extremely high at 28.8%. That means that out of the 86.29 million shares in the tradable float, 27.04 million shares are sold short by the bears. This is a monster short interest on a stock with a low tradable float. Any bullish earnings results could easily spark a huge short-squeeze for shares of 3D Systems post-earnings.

From a technical perspective, 3D Systems is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has just started to bounce sharply higher off its 50-day moving average of $46.52 a share. That move is quickly pushing shares of 3D Systems within range of triggering a major breakout trade post-earnings.

If you're bullish on 3D Systems, 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 $50.98 to its 52-week high at $51.94 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 4.66 million shares. If that breakout hits, then 3D Systems will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $65 to $70 a share.

I would simply avoid 3D Systems or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $46.52 and then below more near-term support at $44 a share with high volume. If we get that move, then 3D Systems will set up to re-test or possibly take out its next major support levels at $41.05 to $39.55 a share. Any high-volume move below those levels will then give 3D Systems a chance to tag its 200-day at $37.43 a share.

SodaStream International

Another potential earnings short-squeeze play is home beverage carbonation systems and products player SodaStream International (SODA), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect SodaStream to report revenue of $129.72 million on earnings of 57 cents per share.

During the last quarter, this company reported revenue of $117.6 million and GAAP reported sales were 34% higher than the prior-year quarter's $87.9 million. Also during last quarter, this company reported non-GAAP EPS of 68 cents per share and GAAP EPS was 57 cents per share, which was 19% higher than the prior-year quarter's 48 cents per share.

The current short interest as a percentage of the float for SodaStream is extremely high at 39.8%. That means that out of the 18.19 million shares in the tradable float, 7.41 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.9%, or by about 1.01 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of SodaStream could explode higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, SodaStream is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has recently downtrended badly from its high of $77.80 to its recent low of $55 a share. During that move, shares of SodaStream have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of SodaStream have started to find buying interest at around $55 to $56 a share. This stock is also trending within range of triggering a near-term breakout trade post-earnings

If you're in the bull camp on SodaStream, 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 $60.81 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.47 million shares. If that breakout triggers, then SodaStream will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $65.72 a share to just under $70 a share. Any high-volume move above $70 will then give SodaStream a chance to tag $74 to $77 a share.

I would simply avoid SodaStream 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 $56.11 to $55 a share with high volume. If we get that move, then SodaStream will set up to re-test or possibly take out its 200-day moving average of $50.95 a share. Any high-volume move below that level will then put $47 to $45 into range for shares of SodaStream.

SunPower

One potential earnings short-squeeze candidate is solar power player SunPower (SPWR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SunPower to report revenue of $578.48 million on earnings of 11 cents per share.

The current short interest as a percentage of the float for SunPower is extremely high at 28.4%. That means that out of the 41.58 million shares in the tradable float, 11.80 million shares are sold short by the bears. This is a huge short interest on a stock with a low tradable float. If the bulls get the earnings news they're looking for, then shares of SunPower could explode higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, SunPower is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares soaring higher from its low of $7.56 to its recent high of $27.66 a share. During that uptrend, shares of SunPower have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SunPower within range of triggering a major breakout trade post-earnings.

If you're bullish on SunPower, 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 at $27.66 a share (or its intraday high on Wednesday if greater) with high volume. Look for volume on that move that registers near or above its three-month average action of 5.92 million shares. If that breakout triggers, then SunPower will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40 a share.

I would avoid SunPower 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 $24.85 a share with high volume. If we get that move, then SunPower will set up to re-test or possibly take out its 50-day moving average of $21.71 a share. Any high-volume move below that level will then put $20 to $18 into range for shares of SunPower.

Trulia

Another earnings short-squeeze prospect is real estate search engine player Trulia (TRLA), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Trulia to report revenue of $27.69 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for Trulia is extremely high at 29.1%. That means that out of the 28.79 million shares in the tradable float, 6.03 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 20.8%, or by about 1.03 million shares. If the bears are caught pressing their bets into a strong quarter, then shares of Trulia could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, Trulia is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last month and change, with shares soaring higher from its low of $27.52 to its recent high of $37.94 a share. During that uptrend, shares of Trulia have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Trulia within range of triggering a near-term breakout post-earnings.

If you're bullish on Trulia, 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 $37.94 a share to its all-time high at $38.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 663,646 shares. If that breakout triggers, then Trulia will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would avoid Trulia 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 $36 to $35 a share with high volume. If we get that move, then Trulia will set up to re-test or possibly take out its next major support level at its 50-day moving average at $32.23 a share. Any high-volume move below its 50-day will then put its next major support levels at $30 to $29 into range for shares of Trulia.

Ruckus Wireless

My final earnings short-squeeze play is provider of Wi-Fi solutions Ruckus Wireless (RKUS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Ruckus Wireless to report revenue of $62.24 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Ruckus Wireless is very high at 12.4%. That means that out of the 48.30 million shares in the tradable float, 5.06 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 65.9%, or by about 2 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of Ruckus could easily spike sharply higher post-earnings.

From a technical perspective, Ruckus is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending strong for the last month and change, with shares soaring higher from its low of $10.24 to its recent high of $14.50 a share. During that uptrend, shares of Ruckus have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Ruckus within range of triggering major breakout trade post-earnings.

If you're in the bull camp on Ruckus, 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 $14.50 a share and then once it clears its gap down day high of $15.40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.43 million shares. If that breakout triggers, then Ruckus will set up to re-fill some of its previous gap down zone from May that started at $19 a share. Any high-volume move above $19 will then give Ruckus a chance to tag $21 to $23 a share.

I would avoid Ruckus 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 $13 to its 50-day at $12.66 a share with high volume. If we get that move, then Ruckus will set up to re-test or possibly take out its next major support levels at $11.26 to its 52-week low of $10.24 a share.

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.