Stock Quotes in this Article: CRM, CYBX, SSI, TFM, WUBA

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.

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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.

58.com

My first earnings short-squeeze play is China-based online marketplace operator 58.com (WUBA), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect 58.com to report revenue of $62.65 million on earnings of 8 cents per share.

The current short interest as a percentage of the float for 58.com is extremely high at 21.4%. That means that out of the 23.20 million shares in the tradable float, 4.96 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 28.8%, or by about 1.11 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of WUBA could easily explode sharply higher post-earnings as the shorts move fast to cover some of their trades.

From a technical perspective, WUBA is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending strong over the last three months, with shares moving higher from its low of $35.75 to its recent high of $57.60 a share. During that uptrend, shares of WUBA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WUBA within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on WUBA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $55.78 to $57.50 a share and then above its all-time high at $58.89 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.30 million shares. If that breakout triggers post-earnings, then WUBA will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $80 a share.

I would simply avoid WUBA 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 $48.11 to $47.80 a share with high volume. If we get that move, then WUBA will set up to re-test or possibly take out its next major support levels at $43 to $38 a share.

The Fresh Market

Another potential earnings short-squeeze trade idea is specialty food retailer The Fresh Market (TFM), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect The Fresh Market to report revenue $411.85 million on earnings of 35 cents per share.

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The current short interest as a percentage of the float for The Fresh Market is extremely high at 28.7%. That means that out of the 43.88 million shares in the tradable float, 12.63 million shares are sold short by the bears. This is a monster short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set off a large short-covering rally post-earnings that forces the bears to cover some of their positions.

From a technical perspective, TFM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern at $28.60 to $29.31 a share. Following that bottom, shares of TFM have started to uptrend and move within range of triggering a near-term breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on TFM, 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 $31.77 to $32.79 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 940,711 shares. If that breakout starts post-earnings, then TFM will set up to re-test or possibly take out its next major overhead resistance levels at $35.89 to $38 a share, or even $40 to $42.50 a share.

I would simply avoid TFM 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 $29.31 to its 52-week low of $28.60 a share with high volume. If we get that move, then TFM will set up to enter new 52-week-low territory below $28.60 a share, which is bearish technical price action.

Cyberonics

Another potential earnings short-squeeze candidate is implantable medical devices player Cyberonics (CYBX), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Cyberonics to report revenue of $74.05 million on earnings of 55 cents per share.

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The current short interest as a percentage of the float for Cyberonics is rather high at 11.6%. That means that out of the 21.65 million shares in the tradable float, 2.52 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4%, or by about 97,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of CYBX could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CYBX is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $55.75 to $56.56 a share. Following that bottom, shares of CYBX have started to trend back above its 50-day moving average of $59.83 a share and it's quickly moving within range of triggering a near-term breakout trade above some key overhead resistance levels.

If you're bullish on CYBX, 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 $63.65 to $64.08 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 228,522 shares. If that breakout materializes post-earnings, then CYBX will set up to re-test or possibly take out its next major overhead resistance levels at $67.12 to $69.18 a share, or even $72 to its 52-week high at $73.52 a share.

I would avoid CYBX or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average of $59.83 a share to some more near-term support at $58.83 a share to with high volume. If we get that move, then CYBX will set up to re-test or possibly take out its next major support levels at $56.56 to $55.27 a share. Any high-volume move below $55.27 will then give CYBX a chance to tag its next major support levels near $52.50 to $50 a share.

Stage Stores

Another earnings short-squeeze prospect is specialty department store 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 $397.57 million on earnings of 53 cents per share.

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The current short interest as a percentage of the float for Stage Stores is pretty high at 11.6%. That means that out of the 30 million shares in the tradable float, 3.58 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by about 145,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of SSI could easily surge sharply higher post-earnings as the shorts jump 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 trending sideways and consolidating for the last three months and change, with shares moving between $17.51 on the downside and $20.32 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of SSI.

If you're bullish on SSI, 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 $19.91 to $20.32 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 233,200 shares. If that breakout begins post-earnings, then SSI will set up to re-test or possibly take out its next major overhead resistance levels at $23 to $25 a share.

I would simply avoid SSI or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $17.75 to $17.51 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 $14 to $13.42 a share.

Salesforce.com

My final earnings short-squeeze play is enterprise cloud computer solutions provider Salesforce.com (CRM), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Salesforce.com to report revenue of $1.29 billion on earnings of 12 cents per share.

Just recently, Deutsche Bank analyst Karl Keirstead said based on various checks within the Salesforce eco-system the company will likely report a solid quarter but not a blowout. Keirstead stated that Salesforces' new President is doing an excellent job with driving growth and delivering results that are more predictable. The firm has a buy rating on the stock with a $65 per share price target.

The current short interest as a percentage of the float for Salesforce.com is notable at 6.9%. That means that out of the 568.85 million shares in the tradable float, 39.77 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of CRM could easily experience a sharp short-covering rally post-earnings that forces the bears to cover some of their positions.

From a technical perspective, CRM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern at $52.48 to $52.50 a share. Following that bottom, shares of CRM have started to uptick and the stock is now moving within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're in the bull camp on CRM, 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 $56.49 to $59.49 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 5.14 million shares. If that breakout develops post-earnings, then CRM will set up to re-test or possibly take out its next major overhead resistance levels at $64 to its 52-week high at $67 a share.

I would avoid CRM 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 $52.50 to $52.48 a share with high volume. If we get that move, then CRM will set up to re-test or possibly take out its next major support levels at $49 to $48.18 a share. Any high-volume move below $481.18 to $47.50 will then give CRM a chance to re-fill its previous gap-up-day zone from 2013 that started at $42.11 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.