Stock Quotes in this Article: ARUN, BMRN, KEG, LEAP, WIFI

WINDERMERE, Fla. (Stockpickr) -- With quarterly earnings season now in full swing on Wall Street, it’s time for market players to create a powerful watch list of stocks due to report numbers that also sport a decent short interest.

Short-sellers hate being caught short a stock that produces bullish results. When this happens, we often see 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 kicks off 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 timeframe that your profits add up quickly.

>>5 Big Stocks to Trade for Gains

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 trade 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. That’s why it can be worth betting prior to the report -- but only if you have a strong conviction that the stock is going to rip higher, and its acting technically bullish.

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

 

BioMarin Pharmaceutical

My first earnings short-squeeze trade idea is biotech player BioMarin Pharmaceutical (BMRN), which is set to report its numbers on Thursday after the market close. This company develops and commercializes pharmaceuticals for serious diseases and medical conditions. Wall Street analysts, on average, expect BioMarin Pharmaceutical to report revenue of $115.30 million on a loss of 11 cents per share.

If you’re looking for a technically strong stock that’s within range of hitting a new 52-week high post-earnings, then make sure to take a hard look at shares of BioMarin Pharmaceutical. This stock is currently trading just one point off its 52-week high of $38.95 as we head closer to its quarterly earnings report.

The current short interest as a percentage of the float for BioMarin Pharmaceutical is notable at 7%. That means that out of the 113.76 million shares in the tradable float, 7.93 million shares are sold short by the bears.

>>6 Drug Stocks Unworthy of a Biotech Bull Market

From a technical perspective, BMRN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for months, with shares consistently making higher lows and higher highs, which is bullish price action. Now this stock is within range of triggering a big post-earnings breakout, and the upside volume patterns during the past few weeks have been ridiculously strong.

If you’re bullish on BMRN, I would look for long-biased trades following its report if the stock takes out $38.95 to $40 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average of 991,058 shares. If those levels get taken out with volume, it would be very bullish since it will push BMRN into all-time high territory. I would look for a large spike of 10% or more post-earnings if that breakout gets triggered.

I would avoid BMRN or look for short-biased trades after they report if the stock fails to trigger that breakout and then drops below some near-term support at $37 a share with volume. I would target a drop back towards its 50-day moving average of $35.26 a share, or possibly lower if the bears slam this down post-earnings.

Aruba Networks

Another potential earnings short-squeeze trade is network access solutions provider Aruba Networks (ARUN), which is set to report results on Thursday after the market close. Wall Street analysts, on average, expect Aruba Networks to report revenue of $125.19 million on earnings of 15 cents per share.

If you’re looking for a heavily shorted stock that’s trading within range of a significant breakout as we head into their quarterly earnings report, then make sure to take a strong look at shares of Aruba Networks.

The current short interest as a percentage of the float for Aruba Networks is very high at 21.4%. That means that out of the 100.38 million shares in the tradable float, 20.88 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.6%, or by about 2 million shares. If the bears are caught pressing their bets into this quarter, then ARUN could easily explode higher since the short interest is so large.

From a technical perspective, ARUN is currently trading above its 50-day and 200-day moving averages, which is bullish. The recent found some big buying interest at around $17.20 a share, and since then it has soared to its current price of just under $24 a share. This large up move now puts ARUN with range of breaking out off a solid earnings report.

If you’re bullish on ARUN, I would look for long-biased trades after it reports if the stock breaks out above $25 to $25.55 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 2.5 million shares. If we get that high-volume breakout, then I would look for ARUN to trade back towards $32 to $34 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid ARUN or look for short-biased trades if this stock fails to breakout after earnings and then drops below its 200-day moving average of $23.33 with heavy volume. If we get that action, then I would target a drop back towards the 50-day moving average of $20.87 a share if the bears whack this lower post-earnings.

Aruba shows up on a lsit of 7 UBS Stock Picks for 2012.

Boingo Wireless

An earnings short-squeeze trade candidate is software and programming player Boingo Wireless (WIFI), which is set to release numbers on Thursday after the market close. This company provides mobile Internet through Wi-Fi networks globally. Wall Street analysts, on average, expect Boingo Wireless to report revenue of $25.14 million on earnings of 6 cents per share.

If you’re looking for a small-cap stock that’s very close to triggering a major breakout as we head closer to its earnings report, then make sure to take a strong look at shares of Boingo Wireless.

>>5 Stocks Poised for Breakouts

The current short interest as a percentage of the float for Boingo Wireless is extremely high at 6.7%. That means that out of the 11.44 million shares in the tradable float, 1.20 million are sold short by the bears. This is a decent short interest and very low float stock, so if the company can deliver strong earnings and bullish forward guidance it could easily see a massive short-squeeze.

From a technical perspective, WIFI is currently trading above its 50-day moving average, which is bullish. This stock recently bounced off its 50-day moving average with strong volume from $8.41 to its current price of just above $9.40 a share. This strong bounce has now pushed the stock within range of breaking out as we head into the quarter.

If you’re bullish on WIFI, I would look for long-biased trades after they report if the stock manages to break out above $9.45 to $9.88 with high-volume. Look for volume that’s tracking in close to or above its three-month average action of 108,473 shares. If we get that action, I would look for WIFI to trend back towards its next significant overhead resistance levels at $10.95 to $12 a share.

I would simply avoid any long-biased trades in WIFI if this stock fails to move above those breakout levels mentioned above post-earnings.

Leap Wireless

An earnings short-squeeze play in the communications services complex is Leap Wireless (LEAP), which is set to release numbers on Thursday after the market close. This company is a wireless communications carrier that offers digital wireless services in the U.S. under the Cricket brand. Wall Street analysts, on average, expect Leap Wireless to report revenue of $807.96 million on a loss of $1.11 per share.

This company missed Wall Street estimates for the last four quarters in a row. During the last quarter, Leap Wireless missed estimates by 10 cents, reporting a loss of 90 cents per share versus a mean estimate of a net loss of 80 cents per share. This company has registered double-digit year-over-year percentage revenue growth for the past four quarters. The average growth during that timeframe was 25.2%.

The current short interest as a percentage of the float for Leap Wireless is rather high at 12.8%. That means that out of the 48.80 million shares in the tradable float, 9.93 million are sold short by the bears. This is another low float stock with a decent short interest. Any good news that the bulls love could easily spark a big short-squeeze.

From a technical perspective, LEAP is currently trading above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has uptrending strong during the last couple of months, rising from its low in October of $5.50 to its current price of just under $9.50 a share. That strong uptrend now sets up LEAP to trigger a big breakout post-earnings if the bulls get the news they’re looking for.

If you’re bullish on LEAP, I would look for long-biased trades after they report if the stock can manage to break out above $9.69 to $10.68 with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 1,799,730 shares. If we get that action, I expect LEAP to spike 15% or more since there’s little overhead resistance on the stock until $13 to $15 a share.

I would simply avoid LEAP or look for short-biased trades if after earnings this stock fails to break out and then takes out its 50-day moving average of $8.98 with volume. Target a drop back toward $8 to $7 a share if the bears hammer this lower post-earnings.

Key Energy Services

My final earnings short-squeeze candidate today is Key Energy Services (KEG), which is set to release numbers on Thursday after the close. This company provides a range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies. Wall Street analysts, on average, expect Key Energy Services to report revenue of $523.22 million on earnings of 31 cents per share.

The current short interest as a percentage of the float for Key Energy Services is decent at 7.5%. That means that out of the 129.02 million shares in the tradable float, 10.67 million shares are sold short by the bears.

From a technical perspective, KEY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently moved back above those key moving averages on monster upside volume. The stock is now within range of triggering a big breakout post-earnings.

If you’re bullish on KEY, I would look for long-biased trades on the stock after it reports earnings if it manages to break out above $16.28 to $16.71 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 2,793,650 shares. If we get that high-volume breakout, then look for KEY to make a run at its next significant overhead resistance level at $20.77 a share in the near future.

I would avoid KEY or look for short biased trades if after earnings the stock fails to break out and then trades below $14.92 (its 50-day) and $14.83 (its 200-day) on high-volume. Target a drop back towards its $12.86 to $12.33 a share if the bears hammer this lower post-earnings.

To see more potential earnings short squeeze plays, including Baidu.com (BIDU), K-Swiss (KSWS) and Rovi (ROVI), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

RELATED LINKS:

>>6 Stocks Funds Love for 2012
>>5 Stocks Poised for Breakouts

>>6 Winning Stocks for Awards Season

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 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.