Stock Quotes in this Article: CRM, EGHT, SHLD, ZUMZ, P

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.

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.

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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.

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.

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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.

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

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Pandora Media

My first earnings short-squeeze trade idea is Internet radio player Pandora Media (P), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Pandora Media to report revenue of $123.83 million on a loss of 10 cents per share.

Just recently, Barclays Capital analyst Anthony DiClemente raised his price target on Pandora shares to $17 from $10 and lifted his rating on the stock to equal weight from underweight, saying the company has made progress in making money from advertising on mobile devices.

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The current short interest as a percentage of the float for Pandora Media is extremely high at 22.1%. That means that out of the 133.15 million shares in the tradable float, 36.65 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Pandora Media could easily soar higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, P 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 $7.53 to its recent high of $17.16 a share. During that uptrend, shares of P have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of P within range of triggering a major breakout trade post-earnings.

If you're bullish on P, 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 $17 to its 52-week high at $17.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.46 million shares. If that breakout triggers, then P will set up to re-test or possibly take out its next major overhead resistance levels at $20 to $22 a share, or even $25 a share.

I would simply avoid P 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 $15.87 a share with high volume. If we get that move, then P will set up to re-test or possibly take out its next major support level at its 50-day moving average of $14.15 a share to $13.80 a share. Any high-volume move below $13.80 will then put $12.76 to $12.66 into range for shares of P.

Sears Holdings

Another potential earnings short-squeeze play is specialty retail stores operator Sears Holdings (SHLD), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Sears Holdings to report revenue of $8.37 billion on a loss of 60 cents per share.

During the last quarter, this company reported revenue of $12.26 billion and GAAP reported sales were 1.8% lower than the prior-year quarter's $12.48 billion. Also during the last quarter, non-GAAP EPS was $1.12 per share and GAAP EPS was -$4.62 versus -22.63 per share for the prior-year quarter.

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The current short interest as a percentage of the float for Sears Holdings is pretty high at 10.1%. That means that out of the 43.31 million shares in the tradable float, 7.81 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 SHLD post-earnings.

From a technical perspective, SHLD 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 pushing higher from its low of $45.61 to its recent high of $60.72 a share. During that uptrend, shares of SHLD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SHLD within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on SHLD, 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 $60.72 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 698,916 shares. If that breakout triggers, then SHLD will set up to re-test or possibly take out its next major overhead resistance levels at $65 to its 52-week high at $68.77 a share.

I would simply avoid SHLD 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 $56.54 a share with high volume. If we get that move, then SHLD will set up to re-test or possibly take out its 50-day at $51.64 a share or its 200-day at $49.93 a share.

Salesforce.com

Another earnings short-squeeze candidate is enterprise cloud computing and social enterprise solutions provider Salesforce.com (CRM), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Salesforce.com to report revenue of $887.08 million on earnings of 10 cents per share.

Just recently, Stephens said its channel checks indicate Salesforce.com will report first quarter results ahead of Wall Street consensus expectations. The firm believes the company's pipeline of growth is meaningfully ahead of estimates and keeps an overweight rating on the stock with a $55 price target.

The current short interest as a percentage of the float for Salesforce.com is pretty high at 9.2%. That means that out of the 540.31 million shares in the tradable float, 49.86 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 276.1%, or by about 36.60 million shares. If the bears are caught pressing their bets into a strong quarter, then shares of CRM could easily explode higher post-earnings.

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From a technical perspective, CRM 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 soaring higher from its low of $39.75 to its recent high of $47.58 a share. During that uptrend, shares of CRM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CRM within range of triggering a major breakout trade post-earnings.

If you're bullish on CRM, 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 $47.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6.25 million shares. If we get that breakout, then CRM will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share.

I would avoid CRM 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 $45 to $44 a share with high volume. If we get that move, then CRM will set up to re-test or possibly take out its 50-day moving average at $42.94 a share. Any high-volume move below $42.94 will then put $42 to its 200-day moving average at $40.45 into range for shares of CRM.

8x8

Another earnings short-squeeze prospect is voice over Internet protocol (VoIP) technology and services provider 8x8 (EGHT), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect 8x8 to report revenue of $28.28 million on earnings of 6 cents per share.

The current short interest as a percentage of the float for 8x8 is notable at 7.6%. That means that out of the 62.14 million shares in the tradable float, 5.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.1%, or by about 390,000 shares. If the bears are caught leaning too strong into a bullish quarter, then shares of EGHT could easily jump significantly higher post-earnings.

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From a technical perspective, EGHT 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 two months and change, with shares pushing higher from its low of $6 to its intraday high of $7.70 a share. During that uptrend, shares of EGHT have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of EGHT within range of triggering a near-term breakout trade post-earnings.

If you're bullish on EGHT, 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 $7.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 606,318 shares. If that breakout triggers, then EGHT will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $9 to $10 a share, or even $11 a share.

I would avoid EGHT 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 $7.40 to its 50-day at $7.10 a share with high volume. If we get that move, then EGHT will set up to re-test or possibly take out its next major support levels at its 200-day of $6.71 a share.

Zumiez

My final earnings short-squeeze play is Zumiez (ZUMZ), a specialty retailer of action sports related apparel, footwear, equipment and accessories, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Zumiez to report revenue of $147.66 million on earnings of 12 cents per share.

The current short interest as a percentage of the float for Zumiez is extremely high at 17.8%. That means that out of the 21.44 million shares in the tradable float, 3.83 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or about 51,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of ZUMZ could easily rip higher post-earnings.

From a technical perspective, ZUMZ 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 five months, with shares soaring higher from its low of $17.93 to its recent high of $33.11 a share. During that uptrend, shares of ZUMZ have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ZUMZ within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on ZUMZ, 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 $33.11 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 488,255 shares. If that breakout triggers, then ZUMZ will set up to re-test or possibly take out its next major overhead resistance levels at $36 to $38.50 a share.

I would simply avoid ZUMZ 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 $30 to $29 a share with high volume. If we get that move, then ZUMZ will set up to re-test or possibly take out its next major support level at its 50-day moving average of $27.24 a share. Any high-volume move below $27.24 a share will then put its 200-day at $25.20 into range for shares of ZUMZ.

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.