Stock Quotes in this Article: FINL, KBH, PAYX, SCHN, BBRY

MADISON, 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.

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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 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.

BlackBerry

My first earnings short-squeeze play is designer, manufacturer and marketer of wireless solutions BlackBerry (BBRY), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue of $3.38 billion on earnings of 11 cents per share.

Just this morning, Citigroup's Jim Suva reiterated his sell rating on BBRY and slapped a $10 per share price target on the name, citing weak demand with the addition of newer models from other smartphone makers. However, Suva notes that given the high level of short interest, we could see a short squeeze on any upside surprise to sell in units.

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The current short interest as a percentage of the float for BlackBerry is extremely high at 34.7%. That means that out of the 485.14 million shares in the tradable float, 171.31 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of BBRY could skyrocket higher post-earnings.

From a technical perspective, BBRY is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been moving sideways for the last month, with shares trending between $13.30 on the downside and $15 on the upside. A high-volume move above the upper-end of its recent range could trigger a breakout trade for shares of BBRY post-earnings.

If you're bullish on BBRY, 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 $15 to $15.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 28.16 million shares. If that breakout triggers, then BBRY will set up to re-test or possibly take out its next major overhead resistance levels at $17 to its 52-week high at $18.32 a share. Any high-volume move above $18.32 will then give BBRY a chance to trend north of $20 a share.

I would simply avoid BBRY 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 $13.50 to $13.30 a share with high volume. If we get that move, then BBRY will set up to re-test or possibly take out its next major support levels at $12.55 to its 200-day moving average at $12.44 a share. Any high-volume move below $12.44 will then give BBRY a chance to trend lower toward $12 to $11 a share.

Paychex

Another potential earnings short-squeeze trade is payroll, human resource and benefits outsourcing solutions provider Paychex (PAYX), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Paychex to report revenue of $585.96 million on earnings of 38 cents per share.

The current short interest as a percentage of the float for Paychex is notable at 6.3%. That means that out of the 325.36 million shares in the tradable float, 20.51 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally if Paycheck delivers the earnings news the bulls are looking for.

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From a technical perspective, PAYX 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 $30.55 to its recent high of $38.66 a share. During that uptrend, shares of PAYX have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PAYX within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on PAYX, 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 $38 to its 52-week high at $38.66 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.24 million shares. If that breakout triggers, then PAYX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $47 a share.

I would simply avoid PAYX 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 its 50-day moving average of $37.09 a share to $36.14 a share with high volume. If we get that move, then PAYX will set up to re-test or possibly take out its 200-day moving average at $33.89 a share.

Finish Line

One potential earnings short-squeeze candidate is mall-based specialty retailer of athletic footwear, apparel and accessories Finish Line (FINL), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Finish Line to report revenue of $344.22 million on earnings of 16 cents per share.

Just recently, an analyst for Stern Agee reduced his earnings outlook for Finish Line, saying the company is losing focus with its core customer.

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The current short interest as a percentage of the float for Finish Line is pretty high at 9.7%. That means that out of the 48.12 million shares in the tradable float, 4.69 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of FINL post-earnings.

From a technical perspective, FINL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last two months, with shares moving between $20.47 on the downside and $22.26 on the upside. A high-volume move above the upper-end of its recent range could trigger a breakout trade for shares of FINL post-earnings.

If you're bullish on FINL, 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 $21.63 to $22.26 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 586,106 shares. If we get that breakout, then FINL will set up to re-test or possibly take out its next major overhead resistance levels at $24.65 to $25.76 a share. Any high-volume move above those levels will give FINL a chance to tag $30 a share.

I would avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $20.54 a share and its 200-day at $19.85 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its next major support levels at $19 to $18 a share. Any high-volume move below those levels will then put $17.50 to $17 into range for shares of FINL.

KB Home

Another earnings short-squeeze prospect is builder of single-family residential homes, townhomes and condominiums KB Home (KBH), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect KB Home to report revenue of $450.80 million on a loss of 7 cents per share.

Just this morning, Case-Shiller Index data was released that showed home prices jumped 2.5% in April, which registered record monthly growth and the fasted year-over-year growth in seven years.

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The current short interest as a percentage of the float for KB Home is extremely high at 19.9%. That means that out of the 72.17 million shares in the tradable float, 14.40 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.7%, or by about 1.73 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of KBH could trend sharply higher post-earnings.

From a technical perspective, KBH is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last two months, with shares dropping from its high of $25.14 to its recent low of $18.30 a share. During that downtrend, shares of KBH have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of KBH have started to bounce off its 200-day moving average and it's quickly moving within range of triggering a near-term breakout trade.

If you're bullish on KBH, 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 $21 to $22.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.26 million shares. If that breakout triggers, then KBH will set up to re-test or possibly take out its next major overhead resistance levels at $24 to its 52-week high at $25.14 a share. Any high-volume move above those levels will give KBH a chance to tag $30 a share.

I would avoid KBH or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $18.23 and then below more key support at $17.11 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support levels at $16 to $14 a share.

Schnitzer Steel Industries

My final earnings short-squeeze trade idea is recycler of ferrous and nonferrous scrap metal Schnitzer Steel Industries (SCHN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Schnitzer Steel Industries to report revenue of $737.76 million on earnings of 12 cents per share.

The current short interest as a percentage of the float for Schnitzer Steel Industries is pretty high at 11%. That means that out of the 24.68 million shares in the tradable float, 2.73 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SCHN could easily experience a solid short-squeeze post-earnings.

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From a technical perspective, SCHN 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 six months, with shares dropping from its high of $30.99 to its recent low of $22.90 a share. During that move, shares of SCHN have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of SCHN have held above its low of $22.90 off its latest pullbacks, and the stock is now starting to move within range of triggering a near-term breakout trade.

If you're in the bull camp on SCHN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day at $24.98 a share and then above more resistance at $25.23 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 309,075 shares. If we get that breakout, then SCHN will set up to re-test or possibly take out its 200-day moving average at $27.55 a share. Any high-volume move above that level will then give SCHN a chance to tag or trend north of $30 a share.

I would avoid SCHN 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 $23.41 to its 52-week low at $23.07 a share with high volume. If we get that move, then SCHN will set up to enter new 52-week low territory, which is bearish technical price action. Some possible downside targets off that move are $20 to $18 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 Madison, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, 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.