Stock Quotes in this Article: ACAD, DGIT, FIO, FSLR, SCTY

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.

>>5 Rocket Stocks Ready to 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.

>>5 Stocks Under $10 Set to Soar

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.

>>5 Surprise Stocks the Pros Love Right Now

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Acadia Pharmaceuticals

My first earnings short-squeeze play is Acadia Pharmaceuticals (ACAD), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Acadia to report revenue of $450,000 on a loss of 9 cents per share.

>>4 Biotech Stocks to Trade for Breakouts

The current short interest as a percentage of the float for ACADIA Pharmaceuticals is rather high at 10.3%. That means that out of the 49.34 million shares in the tradable float, 8.95 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could rip sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, ACAD 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 $5.72 to its intraday high of $21.30 a share. During that move, shares of ACAD have been consistently making higher lows and higher highs, which is bullish technical price action.

If you're bullish on ACAD, 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 its 52-week high of $21.30 a share (or its intraday high Tuesday if greater) with high volume. Look for volume on that move that registers near or above its three-month average volume of 3.21 million shares. If that breakout hits, then ACAD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.

I would simply avoid ACAD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $18.47 to its 50-day moving average at $18.06 a share with high volume. If we get that move, then ACAD will set up to re-test or possibly take out its next major support levels at $16.26 to $14 a share.

Digital Generation

Another potential earnings short-squeeze trade idea is ad management and distribution platform player Digital Generation (DGIT), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Digital Generation to report revenue of $92.60 million on earnings of 2 cents per share.

During the last quarter, this company reported revenue of $92 million, and GAAP reported sales were 0.9% lower than the prior-year quarter's $92.8 million.

>>5 Stocks Ready to Break Out

The current short interest as a percentage of the float for Digital Generation is extremely high at 42.5%. That means that out of the 17.35 million shares in the tradable float, 8.57 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.9%, or by about 913,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of DGIT could soar substantially higher as the shorts jump to cover some of their bets.

From a technical perspective, DGIT 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 for the last month and change, with shares moving higher from its low of $6.15 to its recent high of $8.19 a share. During that move, shares of DGIT have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DGIT within range of triggering a major breakout trade.

If you're in the bull camp on DGIT, 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 $8.03 to $8.19 a share and then once it clears its 200-day at $8.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 453,871 shares. If that breakout triggers, then DGIT will set up to re-test or possibly take out its next major overhead resistance levels at $10.32 to $10.82 a share. Any high-volume move above those levels will then put $11.50 into range for shares of DGIT.

I would simply avoid DGIT 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 $7.46 to its 50-day at $7.36 a share with high volume. If we get that move, then DGIT will set up to re-test or possibly take out its next major support levels at $6.15 to $5.78 a share.

SolarCity

One potential earnings short-squeeze candidate is solar energy player SolarCity (SCTY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SolarCity to report revenue of $27.44 million on a loss of 38 cents per share.

>>4 Big Stocks on Traders' Radars

The current short interest as a percentage of the float for SolarCity is pretty high at 15.9%. That means that out of the 31.84 million shares in the tradable float, 4.61 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 SCTY could explode higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, SCTY is currently trending above its 50-day moving average, which is bullish. This stock is ripping higher today right off it 50-day with strong upside volume. This move has started to push shares of SCTY into breakout territory, since the stock has cleared some near-term overhead resistance at $44.98 a share. That move is quickly pushing shares of SCTY within range of triggering another major breakout trade post-earnings.

If you're bullish on SCTY, 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 $46 to $50 a share and then once it clears its all-time high at $52.77 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.64 million shares. If that breakout hits, then SCTY will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would avoid SCTY 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 $39.90 a share and then below more near-term support at $38.80 share with high volume. If we get that move, then SCTY will set up to re-test or possibly take out its next major support levels at $37.30 a share to $32.66 a share.

Fusion-IO

Another earnings short-squeeze prospect is datacenter solutions provider Fusion-IO (FIO), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Fusion-IO to report revenue of $110.20 million on a loss of 3 cents per share.

>>5 Tech Stocks Rising on Big Volume

The current short interest as a percentage of the float for Fusion-IO is extremely high at 46.7%. That means that out of the 88.09 million shares in the tradable float, 30.03 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.4%, or by about 1.80 million shares. If the bears are caught pressing their bets into a strong quarter, then shares of FIO could explode sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, FIO is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $12.72 to its recent high of $15.45 a share. During that move, shares of FIO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FIO within range of triggering a major breakout trade.

If you're bullish on FIO, 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 $15.45 to $15.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.02 million shares. If that breakout triggers, then FIO will set up to re-fill some of its previous gap down zone from May that started near $18.50 a share. Any high-volume move above $18.50 to $18.74 will then put $22.50 to $25 into range for shares of FIO.

I would avoid FIO 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 of $14.29 a share and then below more support at $14.26 a share with high volume. If we get that move, then FIO will set up to re-test or possibly take out its next major support levels at $13.60 to $12.72 a share.

First Solar

My final earnings short-squeeze play is solar energy player First Solar (FSLR), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect First Solar to report revenue of $721.08 million on earnings of 52 cents per share.

>>3 Hot Stocks to Trade (or Not)

The current short interest as a percentage of the float for First Solar is extremely high at 16.2%. That means that out of the 63.28 million shares in the tradable float, 11.23 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. If the bulls get the earnings news they're looking for, then shares of FSLR could soar higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, FSLR 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 month, with shares moving between $45 on the downside and $51.60 on the upside. A high-volume move above the upper-end of its recent range could trigger a major breakout trade for shares of FSLR post-earnings.

If you're in the bull camp on FSLR, 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 $50 to $51.60 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 6.40 million shares. If that breakout triggers, then FSLR will set up to re-test or possibly take out its next major overhead resistance levels at $56.70 to its 52-week high at $59 a share. Any high-volume move above $59 will then put $65 to $70 into range for shares of FSLR.

I would avoid FSLR 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 $46.30 to $45 a share with high volume. If we get that move, then FSLR will set up to re-test or possibly take out its next major support levels at $40.46 to its 200-day moving average at $36.01 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.

RELATED LINKS:

>>5 Stocks With Big Insider Buying
>>3 Big-Volume Stocks in Breakout Territory

>>5 REITs Income Investors Love -- and So Should You

Follow Stockpickr on Twitter and become a fan on Facebook.

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.