Stock Quotes in this Article: IOC, M, TEAR, XONE, CST

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.

ExOne

My first earnings short-squeeze play is three-dimensional printing machines and printed products provider ExOne (XONE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect ExOne to report revenue of $9.33 million on a loss of 6 cents per share.

The current short interest as a percentage of the float for ExOne is extremely high at 30.4%. That means that out of the 6.78 million shares in the tradable float, 2.15 million shares are sold short by the bears. This is a huge short interest on a stock with a very small tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of XONE post-earnings.

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From a technical perspective, XONE 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 moving higher from its low of $24.13 to its recent high of $75.37 a share. During that move, shares of XONE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of XONE within range of triggering a major breakout trade post-earnings.

If you're bullish on XONE, 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 $69.84 a share its all-time high at $75.37 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 673,550 shares. If that breakout triggers, then XONE will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $85 to $95 a share.

I would simply avoid XONE 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 at $65 a share with high volume. If we get that move, then XONE will set up to re-test or possibly take out its next major support levels at $62.70 to its 50-day moving average at $59.04 a share. Any high-volume move below its 50-day will then put its next major support levels at $55.50 to $50 a share within range for shares of XONE.

CST Brands

Another potential earnings short-squeeze trade is CST Brands (CST), a retailer of transportation fuels and convenience goods in North America, which is set to release its numbers Tuesday before the market open. Wall Street analysts, on average, expect CST Brands to report revenue of $3.19 billion.

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The current short interest as a percentage of the float for CST Brands is very high at 19.4%. That means that out of the 55.66 million shares in the tradable float, 11.75 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could easily rip substantially higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, CST is currently trending above its 50-day moving average, which is bullish. This stock has been trending sideways for the last three months, with shares moving between $30.31 on the downside and $33.96 on the upside. A high-volume move above the upper-end of its recent range could trigger a major breakout trade for shares of CST post-earnings.

If you're in the bull camp on CST, 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 $32.99 to its all-time high at $33.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.29 million shares. If that breakout hits, then CST will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $45 a share.

I would simply avoid CST 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 $32.12 a share with high volume. If we get that move, then CST will set up to re-test or possibly take out its next major support levels at $31.06 to $30.31 a share. Any high-volume move below those levels will then put its next major support levels at $29.70 to $28.70 within range for shares of CST.

TearLab

One potential earnings short-squeeze candidate is in-vitro diagnostic player TearLab (TEAR), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect TearLab to report revenue of $3.51 million on a loss of 13 cents per share.

This company has managed to top Wall Street estimates two times over the last four quarters, which is a bullish earnings trend. If TearLab can delve another beat, then shares could be setting up for a large move higher.

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The current short interest as a percentage of the float for TearLab is extremely high at 37.1%. That means that out of the 25.54 million shares in the tradable float, 8.59 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of TEAR could easily explode higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, TEAR 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 moving higher from its low of $5.26 to its recent high of $15.18 a share. During that uptrend, shares of TEAR have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TEAR within range of triggering a major breakout trade post-earnings.

If you're bullish on TEAR, 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 $14.28 to its 52-week high at $15.18 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 942,598 shares. If that breakout hits, then TEAR will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $18 to $20 a share.

I would avoid TEAR 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 $11.95 to $11.25 a share with high volume. If we get that move, then TEAR will set up to re-test or possibly take out its next major support levels at $9.90 to $9 a share.

InterOil

Another earnings short-squeeze prospect is integrated energy player InterOil (IOC), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect InterOil to report revenue of $261.35 million on a loss of 7 cents per share.

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The current short interest as a percentage of the float for InterOil is extremely high at 33.2%. That means that out of the 32.97 million shares in the tradable float, 11.82 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.4%, or by about 384,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of IOC could trend substantially higher post-earnings as the bears abandon some of their bets.

From a technical perspective, IOC 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 and change, with shares moving higher from its low of $65.08 to its recent high of $91.04 a share. During that uptrend, shares of IOC have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of IOC within range of triggering a major breakout trade.

If you're bullish on IOC, 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 $88.09 to $91.04 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 763,608 shares. If that breakout triggers, then IOC will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $106.44 a share. Any high-volume move above $106.44 will then give IOC a chance to tag $110 to $115 a share.

I would avoid IOC 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 $83.53 to $80.58 a share with high volume. If we get that move, then IOC will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $77.49 a share to its 200-day moving average at $70.49 a share.

Macy's

My final earnings short-squeeze play is department store retailer Macy's (M), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Macy's to report revenue of $6.28 billion on earnings of 79 cents per share.

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Over the last two quarters, Macy's revenue has increased. In the most recent quarter, revenue jumped 4% year-over-year to $6.39 billion, and in the quarter before that, it rose 7%. This company's profit has dropped year-over-year in each of the last two quarters. During the first quarter, profit fell by 22% and in the four quarter it dropped by 2%.

The current short interest as a percentage of the float for Macy's is notable at 3.6%. That means that out of the 382.08 million shares in the tradable float, 13.61 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.9%, or by about 1.55 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of M could trend sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, M is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $47.45 to $47.32 a share. If that bottom can hold, then shares of M could bet setting up to triggering a major breakout trade post-earnings.

If you're in the bull camp on M, 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 $49.72 to its 52-week high at $50.77 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.70 million shares. If that breakout triggers, then M will set up to trend back above its 50-day at $48.52 a share and it will enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would avoid M 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 $47.45 to $47.32 a share with high volume. If we get that move, then M will set up to re-test or possibly take out its next major support levels at $45.69 to $44 a share. Any high-volume move below those levels will then put its 200-day at $42.85 into range for shares of M.

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.