Stock Quotes in this Article: BKE, LQDT, SHLD, SSI, P

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.

Liquidity Services

My first earnings short-squeeze trade idea is surplus and salvage assets auction marketplace player Liquidity Services (LQDT), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Liquidity Services to report revenue of $124.48 million on earnings of 45 cents per share.

The current short interest as a percentage of the float Liquidity Services is extremely high at 34.7%. That means that out of the 25.21 million shares in the tradable float, 9.12 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of LQDT post-earnings.

From a technical perspective, LQDT is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last month, with shares moving higher from its low of $24.77 to its recent high of $28.25 a share. During that move, shares of LQDT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LQDT within range of triggering a breakout trade post-earnings.

If you're bullish on LQDT, 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 $28.25 a share, and then once it takes out both its 50-day at $29.59 and its 200-day at $31.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 414,200 shares. If that breakout hits, then LQDT will set up to re-test or possibly take out its next major overhead resistance levels at $36 to $38 a share.

I would simply avoid LQDT 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 $26 to its 52-week low at $24.77 a share with high volume. If we get that move, then LQDT will set up to enter new 52-week low territory, which is bearish technical price action. Some possible targets if $24.77 gets taken out with volume are $20 to $18 a share.

Sears Holdings

Another potential earnings short-squeeze play is specialty retail store player Sears Holdings (SHLD), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Sears Holdings to report revenue $8.39 billion on a loss of $3.13 per share.

The current short interest as a percentage of the float for Sears Holdings is very high at 18.1%. That means that out of the 43.35 million shares in the tradable float, 14 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7%, or by about 915,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of SHLD could experience a large short-squeeze post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, SHLD 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 moving higher from its low of $53.02 to its recent high of $65.70 a share. During that uptrend, shares of SHLD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SHLD within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on SHLD, 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 $65.70 to its 52-week high at $66 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.16 million shares. If that breakout hits, then SHLD will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $$75 to $80 a share.

I would simply avoid SHLD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $59.20 a share with high volume. If we get that move, then SHLD will set up to re-test or possibly take out its next major support levels at $55.87 to $53.02 a share. Any high-volume move below those levels will then put its 200-day at $50.43 into range for shares of SHLD.

Pandora Media

One potential earnings short-squeeze candidate is Internet radio player Pandora Media (P) which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Pandora Media to report revenue of $174.76 million on earnings of 6 cents per share.

Just recently, Piper Jaffray raised its price target on Pandora Media to $37 from $27, noting improving mobile monetization and a more benign competitive landscape now that all the major players have entered the market Piper reiterated its overweight rating on the stock, saying it remains bullish on the name.

The current short interest as a percentage of the float for Pandora Media is pretty high at 13.4%. That means that out of the 137.07 million shares in the tradable float, 23.51 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, the shares of P could explode sharply higher post-earnings as a solid short-covering rally takes hold.

From a technical perspective, P 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 $13.95 to its recent high of $31.94 a share. During that uptrend, shares of P have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of P within range of triggering a big 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 manages to break out above its all-time high at $31.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 11.57 million shares. If that breakout hits, then P will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $50 a share.

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 levels at $28 to $27 a share with high volume. If we get that move, then P will set up to re-test or possibly take out its next major support levels at its 50-day of $26.30 to $25 a share. Any high-volume move below those levels will then put $23 to $22 into range for shares of P.

The Buckle

Another earnings short-squeeze prospect is casual apparel, footwear, and accessories retailer The Buckle (BKE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect The Buckle to report revenue of $291.14 million on earnings of 90 cents per share.

The current short interest as a percentage of the float for The Buckle is extremely high at 20.7%. That means that out of the 27.40 million shares in the tradable float, 5.83 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.5%, or by about 692,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BKE could experience a big short-squeeze post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, BKE 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 month, with shares soaring higher from its low of $46.29 to its intraday high of $53.38 a share. During that uptrend, shares of BKE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BKE within range of triggering a near-term breakout trade post-earnings.

If you're bullish on BKE, 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 $54.54 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 251,408 shares. If that breakout hits, then BKE will set up to re-test or possibly take out its 52-week high at $57.68 a share. Any high-volume move above that level will then give BKE a chance to trend north of $60 a share.

I would simply avoid BKE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $50.89 to its 200-day at $50.53 a share with high volume. If we get that move, then BKE will set up to re-test or possibly take out its next major support levels at $48 to $46.30 a share.

Stage Stores

My final earnings short-squeeze play is Texas-based department and off-price retailer Stage Stores (SSI), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Stage Stores to report revenue of $375.59 million on a loss of 26 cents per share.

The current short interest as a percentage of the float for Stage Stores is extremely high at 23.7%. That means that out of the 28.93 million shares in the tradable float, 7.31 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.5%, or by about 246,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of SSI could easily rip sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, SSI 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 two months and change, with shares moving higher from its low of $18.41 to its recent high of $22.32 a share. During that uptrend, shares of SSI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SSI within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on SSI, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day at $23.24 a share to more past resistance at $25.34 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 418,658 shares. If that breakout hits, then SSI will set up to re-test or possibly take out its 52-week high at $29.59 a share. Any high-volume move above $29.59 will then give SSI a chance to trend north of $30 a share.

I would avoid SSI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $20.30 a share with high volume. If we get that move, then SSI will set up to re-test or possibly take out its next major support levels at $18.81 to its 52-week low at $18.41 a share. Any high-volume move below $18.41 will then push shares of SSI into new 52-week low territory, which is bearish technical price action. Some possible downside targets below $18.41 are $16 to $15 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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