Stock Quotes in this Article: ADTN, CREE, DGII, EZPW, FAST, GMT, PLXS, XLNX

WINDERMERE, Fla. (Stockpickr) -- With earnings season about to kickoff on Wall Street, it’s time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.

Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see 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 timeframe 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.

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    Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. That’s why it can be worth betting prior to the report – buy only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

    Plexus

    My first earnings short-squeeze idea is electronic instrument and controls player Plexus (PLXS), which is set to report its numbers on Wednesday after the close. Wall Street analysts, on average, expect Plexus to report earnings of 48 cents per share on revenue of $527.80 million.

    If you’re looking for a stock that’s been uptrending very strong ahead of its quarter, then take a strong look at shares of Plexus. This stock has ramped up big from its October low of $21.06 to its current price of just over $32.50 a share. This stock is up over 19% so far in 2012, and it now is trading right below some key breakout levels.

    The current short interest as a percentage of the float for Plexus is 5%. That means that out of the 34.21 million shares in the tradable float, 1.72 million shares are sold short by the bears. This isn’t a huge short interest, but the float is small so it’s more than enough to spark a big short-squeeze if the bulls get the news they’re looking for.

    From a technical standpoint, PLXS is currently trading below above both its 50-day and 200-day moving averages, which is bullish. The strong run in this stock during the last few months has now put it in range to trigger a big breakout trade.

    f you’re bullish on PLXS, I would look to get long after they report their results if the stock trades back above some near-term overhead resistance at $33.79 with volume, and then above $34 to $35.36 a share. Look for volume that’s tracking in close to or above its three-month average of 308,841 shares. If those levels get taken out post-earnings with volume, then look for PLXS to trade back toward $38 to $39 a share.

    I would only get short or avoid any long trades in PLXS if after they have released their results the stock fails to takes out $33.79 with volume. If that level holds as stiff resistance and you get short, I would then add to any positions if it takes out its 200-day moving average of $29.58 with volume. Target a drop back toward its 50-day moving average of $27.37, or possibly lower if the bears destroy this stock post-earnings.

    Cree

    Another potential earnings short-squeeze trade is Cree (CREE), which is set to report results on Tuesday after the market close. This company develops and manufactures semiconductor materials and devices primarily based on silicon carbide, gallium nitride and related compounds. Wall Street analysts, on average, expect Cree to report earnings of 26 cents per share on revenue of $309.85 million.

    This company has been inconsistent with earrings, wavering between beating and failing to beat Wall Street estimates during the past fiscal year. That earnings inconsistency has even lead one firm, Wunderlich to recently say that estimates for Cree remain too high.

    The current short interest as a percentage of the float for Cree is very high at 13.4%. That means that out of the 112.54 million shares in the tradable float, 15.12 million are sold short by the bears. If Cree can manage to show that their earnings results are back on track, then this stock could easily see a big short-squeeze since there are many bears involved in the stock.

    From a technical standpoint, CREE is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock recently put in a near-term bottom at $20.25 a share, and since then it has started to uptrend toward its current price of $23.52. During that uptrend, CREE has been making higher lows and higher highs, which is bullish price action. That said, the stock won’t look really bullish until it can breakout above some key near-term resistance levels.

    If you’re bullish on CREE, I would wait until after they report their results and buy the stock once it breaks out above $23.92 and above its 50-day moving average of $24.48 with heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 3.1 million shares. If we get that high-volume breakout post-earnings, then look for CREE to trade back toward its next significant overhead resistance level at $26.02 a share. I would add to any long positions if that level is then taken out with volume.

    I would avoid any long trades or get short CREE after earnings if it fails to clear its 50-day with volume. If that level holds up as resistance, then I would get short and add to any short positions once CREE takes out $21.38 with volume. Target a drop back toward $20.25, or possibly much lower if the bears hammer this stock post-earnings.

    ADTRAN

    One earnings short-squeeze play in the communications equipment complex is ADTRAN (ADTN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect ADTRAN to report earnings of 46 cents per share on revenue of $174.71 million.

    The current short interest as a percentage of the float for ADTRAN is notable at 7.8%. That means that out of the 63.43 million shares in the tradable float, 4.64 million are sold short by the bears. The bears have been increasing their short positions from the last reporting period by around 6.2%, or by about 271,000 shares.

    From a technical standpoint, ADTN is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently found some buying support at around $27.71 to $27.68 a share. Since finding that support, the stock has rallied up to its current price of just over $31 a share.

    The way I would play ADTN is to wait until after they report their earnings and buy the stock if it holds above its 50-day moving average of $31.17 and if it trades back above today’s high of $32.44 a share. Look for volume that’s tracking in close to or above its three-month average action of 894,976 shares. If we get that move, I would look for this stock to challenge its 200-day moving average of $34.16, or potentially much higher.

    I would only consider shorting this stock after earnings if it drops below its 50-day moving average of $31.17 on heavy volume. If that level is taken out, I would then add to any short position once it drops below some near-term support at $29 a share with volume. If those levels are taken out, I would target a drop back toward $27.70, or possibly much lower if the bears whack this post-earnings.

    Digi International

    One earnings short-squeeze play in the computer hardware complex is Digi International (DGII), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Digi International to report earnings of 2 cents per share on revenue of $48.54 million.

    This stock is currently trading right below some key breakout levels that could get taken out after they report their results. Of course, that will be dependent on if Digi International reports bullish earnings and issues upbeat guidance.

    The current short interest as a percentage of the float for Digi International stands at 6.6%. That means that out of the 25.41 million shares in the tradable float, 1.68 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.6%, or by about 42,000 shares. If the bears are caught leaning to strong into this quarter, then we could easily see a sizable short-squeeze develop.

    From a technical standpoint, DGII is currently trading above both its 50-day moving average and right below its 200-day moving average, which is neutral trendwise. This stock formed a bottom in November and December at around $9.87 to $10.12 a share. After marking that bottom, the stock has started to uptrend to its current price of just under $12 a share. Now shares of DGII are setting up to breakout if the bulls like what they hear post-earnings.

    If you’re bullish on DGII, I would wait until after they report and buy the stock if it takes out $11.92 to $12.05 with volume. Look for a breakout on volume that’s tracking in close to or well above its three-month average action of 117.760 shares. If we get that action, I would then add to any long positions if DGII takes out $12.98 with volume. Target a run back toward $14.21 if the bulls gain control of this stock post-earnings.

    I would only look to short DGII after earnings if it fails to trade back above its 200-day moving average of $12.08 a share with volume. If that level acts as stiff resistance, then I would add to any shorts once DGII then takes out $10.93 with volume. Target a drop back toward $10 a share if the bears hammer this lower post-earnings.

    GATX

    My final earnings short-squeeze candidate is transportation player GATX (GMT), which is set to release numbers on Thursday before the market open. This company leases, operates and manages assets in the rail, marine and industrial equipment markets. Wall Street analysts, on average, expect GATX to report earnings of 55 cents per share on revenue of $332.85 million.

    If you’re looking for a stock that’s getting very close to triggering a big breakout off earnings, then take a strong look at shares of GATX. Over the past three months, this stock has been in a monster uptrend with shares up over 31%. Now the stock is approaching a breakout trade if the bulls get the news they’re looking for.

    The current short interest as a percentage of the float for GATX is worth mentioning at 6.4%. That means that out of the 46.22 million shares in the tradable float, 2.95 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a sharp rally if GATX can deliver bullish earnings and guidance.

    From a technical standpoint, GMT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has run up from its October low of $28.70 to its current price of around $44.50. This strong uptrend now sets up GMT for a breakout trade if it can manage to move above some near-term overhead resistance levels.

    If you’re bullish on GMT, I would wait until after they report earnings and buy some shares if it breaks out above $45.14 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 306,923 shares. If we get that high-volume breakout, then look for GMT to spike 10% to 15% higher post-earnings.

    I would only get short this stock after earnings if it trades back below some near-term support at $42.01 with high-volume. If we get that move, I would then add to any short positions if the stock takes out its 50-day moving average of $41.60 a share with volume. Target a drop back toward $38 or the 200-day moving average of $37.45 a share.

    To see more potential earnings short squeeze plays like Xilinx (XLNX), Ezcorp (EZPW) and Fastenal (FAST), 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 stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.