Stock Quotes in this Article: ADBE, HEI, RAD, RTK, TPLM

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and the one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel to ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it’s never a great idea to stay short once an earnings event 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 couple of these candidates in a year to help enhance your portfolio returns; the gains become so outsized in such a short timeframe 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 from off a short squeeze. When you do this, 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 will miss a lot of the move. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to explode higher.

Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

 

Triangle Petroleum

My first earnings short-squeeze candidate is oil and gas exploration and development player Triangle Petroleum (TPLM), which is set to report its results on Thursday before the market open. Wall Street analysts, on average, expect Triangle Petroleum to report revenue of $3.35 million on a loss of 4 cents per share.

The current short interest as a percentage of the float for Triangle Petroleum is notable at 8.3%. That means that out of the 39.28 million shares in the tradable float, 3.55 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 14%, or by about 435,000 shares.

From a technical standpoint, TPLM is currently trading below both its 50-day and 200-day moving averages, which is bearish. For the past two months, this stock has been trading inside of a range, between $4.80 and $6.40 a share. The stock is currently trading near $5.19 a share and it has just broken below its 50-day moving average of $5.24 a share.

 

If you’re bullish on TPLM, I would look to buy some shares after their report if the stock can manage to hold above that range low of $4.80. I would then add to any long positions once the stock trades above $5.50 on high volume. Look for volume that’s close to or above its three-month average volume of 598,703 shares. Target a run back toward that range high of $6.40, and add to any long positions if that level is taken out with volume.

I would avoid TPLM completely if after their earnings report, the stock takes out $4.80 on heavy volume. A big volume move below that support zone should set this stock up to trade back towards $4 a share, or possibly much lower.

Renetech

Another stock with the potential to see an earnings short squeeze is clean energy solutions provider Renetech (RTK), which is set to release results on Thursday before the market open. Wall Street analysts, on average, expect Renetech to report revenue of $36.78 million.

If you’re looking for a penny stock that’s setting up for a big breakout ahead of its quarter, then take a look at shares of Renetech. This stock has been a stronger performer in 2011 with shares up over 30%. Now the stock is nearing a major breakout if the company can manage to report bullish earnings and forward guidance.

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The current short interest as a percentage of the float for Renetech sits at 4.8%. That means that out of the 215.78 million shares in the tradable float, 10.42 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.1%, or by about 1.4 million shares. If the bears are caught pressing to hard into the quarter, then RTK could zoom to the upside as they cover some of their short bets.

From a technical standpoint, RTK is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock hit a low in October at 72 cents a share, and since then it has been uptrending strong making mostly higher highs and higher lows. The stock now sets up to breakout above some near-term overhead resistance levels if the company can deliver what the bulls are looking for.

If you’re bullish on RTK, I would look to buy this stock after earnings if it manages to break out above $1.65 and $1.70 a share on high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 2.8 million shares. If we get that action, then look for RTK to tag $1.98 a share. If $1.98 gets taken out with volume, then look for an even bigger spike higher in this stock post-earnings.

I would avoid RTK from the long side after its earnings report if the stock drops back below its 50-day moving average of $1.43 a share on heavy volume. A high-volume move below that level could easily set this stock up to re-test $1.30 to $1.20 a share or possibly much lower if the bears hammer this name down post-earnings.

Adobe Systems

One earnings short-squeeze play in the software and programming complex is Adobe Systems (ADBE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Adobe Systems to report revenue of $1.09 billion on earnings of 60 cents per share.

This company matched Wall Street estimates last quarter after missing forecasts in the prior two quarters. Revenue had trended higher for Adobe for the past four quarters. Revenue went up 8.5% in the second quarter, 19.7% in the first quarter and 33.1% in the four quarter.

The current short interest as a percentage of the float for Adobe Systems stands at 3.7%. That means that out of the 488.63 million shares in the tradable float, 17.82 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spike the stock higher if Adobe can report bullish earnings and guidance.

From a technical standpoint, ADBE is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has just started to break below its 50-day moving average of $27.41 a share, since the stock is currently trading at $26.56. The nearest support level on the stock now sits at $26 to $25.72 a share.

If you’re looking to get long ADBE for an earning short-squeeze play, then I would look to be a buyer after it reports its results if the stock can manage to trade back above its 50-day moving average of $27.41 on heavy volume. Look for volume on a move back above that level that registers near or above its three-month average action of about 7 million shares. If we get that move, I would then add to any long positions on a high volume move over $28.18 and above $29.55 (200-day).

I would avoid ADBE or get short this stock after it reports earnings if the stock takes out that key support level at $25.72 on strong volume. A high-volume move below that level should set this stock up to re-test $23 a share, or possibly much lower if the bears hammer this down post-earnings.

Adobe, one of Jim Cramer's Stocks to Watch this week, is a new position in Tiger Global Management's portfolio as of the most recently reported quarter.

Rite Aid

An earnings short-squeeze play in the retail drugstore chain complex is Rite Aid (RAD), which is set to release numbers on Thursday before the market open. This company operates its drugstores in 31 states across the country and in the District of Columbia. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.29 billion on a loss of 12 cents per share.

When Rite Aid reports for this quarter, the company is hoping it can register its third quarter in a row of beating Wall Street estimates. During the last quarter, it beat estimates after reporting a loss of 12 cents per share.

The current short interest as a percentage of the float for Rite Aid sits at 9.7%. That means that out of the 652.81 million shares in the tradable float, 59.56 million are sold short by the bears. This stock has a decent short interest for a name that trades under $5 a share.

From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock put in a near-term bottom at $0.85 back in October, and since then, it has uptrended strong making higher highs and higher lows.

If you’re bullish on RAD, I would wait until after its report and buy some shares if the stock breaks out above some near-term overhead resistance at $1.25 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 8,261,500 shares. If we get that action, then look for RAD to make a run at $1.50 a share or possibly much higher if the bulls gain full control of this stock post-earnings.

I would avoid this stock altogether if after its report shares drop back below both its 50-day of $1.13 and 200-day of $1.13 on heavy volume.

Rite Aid shows up on a November list of 11 Stocks Under $11 for a Rebound.

Heico

One final earnings short-squeeze idea play is aerospace and defense player Heico (HEI), one of TheStreet Ratings' top-rated aerospace and defense stocks, which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Heico to report revenues of $192.69 million.

If you’re looking for a strong uptrending stock ahead of the quarter, then take a strong look at shares of Heico. This stock has returned over 40% so far in 2011, and its currently trading just three points off of its 52-week high of $60.94 a share.

The current short interest as a percentage of the float Heico is very high at 29.1%. That means that out of the 33.61 million shares in the tradable float, 3.37 million are sold short by the bears. This is a huge short interest on a stock with a reasonably low float. Any bullish earnings news should set this stock off for a monster short-squeeze.

From a technical standpoint, HEI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock hit a low in October at $45.18 a share, and since then, it has been uptrending strong making mostly higher highs and higher lows. Now HEI is setting up for a big breakout post-earnings if the company can report earnings that the bulls love.

If you’re bullish on HEI, I would wait until after its report and buy the stock as long as it stays above its 50-day moving average of $56.42 a share. If that level holds, I would then add aggressively once HEI triggers a major breakout above $60.50 to $60.94 on heavy volume. Look for volume that registers close to or above its three-month average action of 195,625 shares.

I would short or avoid HEI after its earnings report only if the stock drops back below its 50-day of $56.42 on heavy volume. If that level is taken out post-earnings, then target a drop back towards the 200-day moving average of $51.79 a share, or possibly even lower if the bears gain control of this stock.

To see more potential earnings short squeeze candidates, including Quiksilver (ZQK), PURE Bioscience (PURE) and Imperial Sugar (IPSU), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

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

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.