Stock Quotes in this Article: IRBT, LL, NFLX, RDN, TRIP

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.

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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.

Netflix

My first earnings short-squeeze trade idea is provider of Internet subscription service streaming TV shows and movies Netflix (NFLX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.07 billion on earnings of 40 cents per share.

The current short interest as a percentage of the float for Netflix is pretty high at 13.1%. That means that out of the 49.65 million shares in the tradable float, 7.21 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of NFLX have a great chance to explode higher post-earnings as the bears rush to cover some of their short positions.

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From a technical perspective, NFLX 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 moving higher from its low of $205.75 to its recent high of $270.31 a share. During that move, shares of NFLX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of NFLX within range of triggering a near-term breakout trade.

If you're bullish on NFLX, 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 $270.31 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 3.63 million shares. If that breakout triggers, then NFLX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $300 to its all-time high at $305 a share. Any high-volume move above $305 will then give NFLX a chance to tag $310 to $320 a share.

I would simply avoid NFLX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $260 to $255 a share with high volume. If we get that move, then NFLX will set up to re-test or possibly take out its next major support levels at $240 to its 50-day moving average of $230.36 a share. Any high-volume move below those levels will then give NFLX a chance to hit its next major support levels at $220 to $210 a share.

Radian Group

Another potential earnings short-squeeze play is credit-related insurance coverage and financial services player Radian Group (RDN), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Radian Group to report revenue of $203.09 million on a loss of 5 cents per share.

During the last quarter, this company reported revenue of $42.2 million and GAAP reported sales were 76% lower than the prior-year quarter's $180.4 million.

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The current short interest as a percentage of the float for Radian Group is extremely high at 27.6%. That means that out of the 151.24 million shares in the tradable float, 47.3 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.4%, or by about 1.99 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of RDN could easily explode higher post-earnings.

From a technical perspective, RDN 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 moving higher from its low of $10.86 to its recent high of $13.37 a share. During that uptrend, shares of RDN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RDN within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on RDN, 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 $13.37 to $13.65 a share and then once it takes out its 52-week high at $14.34 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 7.25 million shares. If that breakout hits, then RDN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $20 to $23 a share.

I would simply avoid RDN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average at $12.65 a share with high volume. If we get that move, then RDN will set up to re-test or possibly take out its next major support levels at $12 to $11.65 a share, or even $10.86 a share.

Lumber Liquidators

One potential earnings short-squeeze candidate is retailer of hardwood flooring and hardwood flooring enhancements and accessories Lumber Liquidators (LL), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lumber Liquidators to report revenue of $244.22 million on earnings of 61 cents per share.

During the last quarter, this company reported revenue of $230.4 million and GAAP reported sales were 23% higher than the prior-year quarter's $188 million. Also during the last quarter, this company reported EPS of 57 cents per share and GAAP EPS was 57 cents per share, which was 97% higher than the prior-year quarter's 29 cents per share.

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The current short interest as a percentage of the float for Lumber Liquidators is very high at 15.7%. That means that out of the 26.24 million shares in the tradable float, 4.17 million shares are sold short by the bears. This is a big short interest on a stock with a very low tradable float. The bears have also been increasing their bets from the last reporting period by 2.5%, or by about 100,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of LL could rip significantly higher post-earnings.

From a technical perspective, LL 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 $71.63 to its intraday high of $88.90 a share. During that uptrend, shares of LL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LL within range of triggering a major breakout trade.

If you're bullish on LL, 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 $89.24 to $89.36 a share and then once it takes out its 52-week high at $90.92 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 778,024 shares. If that breakout triggers, then LL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $100 to $120 a share.

I would avoid LL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average at $84.04 a share with high volume. If we get that move, then LL will set up to re-test or possibly take out its next major support levels at $77.50 to $71.63 a share. Any move below $71.63 will then put its 200-day moving average at $65.95 into range for shares of LL.

iRobot

Another earnings short-squeeze prospect is developer and manufacturer of robotic solutions to real-world problems iRobot (IRBT), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect iRobot to report revenue of $128.90 million on earnings of 19 cents per share.

During the last quarter, this company reported revenue of $106.2 million and GAAP reported sales were 8.6% higher than the prior-year quarter's $97.8 million.

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The current short interest as a percentage of the float for iRobot is large at 10.8%. That means that out of the 27 million shares in the tradable float, 2.89 million shares are sold short by the bears. This stock sports a big short interest and it has an extremely low float. The bears have also been increasing their bets from the last reporting period by 28.9%, or by about 648,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of IRBT could easily experience a monster short-squeeze that sends shares soaring higher.

From a technical perspective, IRBT 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 $19.91 to its recent high of $41.12 a share. During that uptrend, shares of IRBT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of IRBT within range of triggering a major breakout trade post-earnings.

If you're bullish on IRBT, 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 $40 to its 52-week high at $41.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 603,159 shares. If that breakout triggers, then IRBT will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would avoid IRBT 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 $37.30 a share to its 50-day moving average at $36.17 a share with high volume. If we get that move, then IRBT will set up to re-test or possibly take out its next major support levels at $33.72 to $32.06 a share, or even $30 a share.

TripAdvisor

My final earnings short-squeeze trade idea is online travel research player TripAdvisor (TRIP), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect TripAdvisor to report revenue of $236.21 million on earnings of 49 cents per share.

Just recently, Ascendiant Capital Markets initiated a buy rating on shares of TripAdvisor with a price target of $76 per share.

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The current short interest as a percentage of the float for TripAdvisor is very high at 14.3%. That means that out of the 112.06 million shares in the tradable float, 15.93 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of TRIP could easily rip significantly higher post-earnings.

From a technical perspective, TRIP 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 trending sideways for the last two months and change, with shares moving between $65.41 on the upside and $58.74 on the downside. A high-volume move above the upper-end of its sideways trading chart pattern post-earnings could trigger a major breakout trade for shares of TRIP.

If you're in the bull camp on TRIP, 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 $62.97 to $63.75 a share and then once it clears more resistance at $65.20 to its 52-week high at $65.41 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.98 million shares. If that breakout triggers, then TRIP will set up to enter new 52-week-high territory above $65.20, which is bullish technical price action. Some possible upside targets off that breakout are $75 to $80 a share.

I would avoid TRIP 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 $59.74 to $58.74 a share with high volume. If we get that move, then TRIP will set up to re-test or possibly take out its next major support levels at $52 to $50. Any high-volume move below those levels will then put its 200-day moving average at $48.06 into range for shares of TRIP.

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.