Stock Quotes in this Article: QDEL, SIGA, SPPI, SRZ, WPRT

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces bullish results. When this happens, we often see tradable short-squeezes develop as the bears rush to cover their positions to avoid big losses. Even the savviest short-sellers know that it’s not wise to be caught short a stock 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.

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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 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.

 

Westport Innovations

My first earnings short-squeeze trade candidate is auto and truck parts player Westport Innovations (WPRT), which is set to report its numbers on Wednesday after the market close. This is a provider of engine and fuel system technologies utilizing gaseous fuels. Wall Street analysts, on average, expect Westport Innovations to report revenue of $58.34 million on a loss of 26 cents per share.

On Monday, Jefferies raised its price target on Westport Innovations from $45 to $55, noting that 2012 sales are on track to be $400 to $425 million, which is well above the firm’s $300 million estimate. Jefferies said, “With more OEM partnerships and platforms likely, and order patterns improving, we raise our target $10 to $55.”

The current short interest as a percentage of the float for Westport Innovations is extremely high at 17.1%. That means that out of the 35.62 million shares in the tradable float, 6.79 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by If the bears are caught leaning too strong into this quarter, then this stock could very easily short-squeeze big. The float for WPRT is very small and the short interest is big, so if the bulls get the news they’re looking for, the stock will skyrocket.

From a technical perspective, WPRT is currently trading above both its 50-day and 200-day moving averages, which is bullish. That said, the stock recently hit a high of $47.38, and has since then turned sharply lower to $41 a share on massive volume. That massive selling volume is a cause for concern, but the stock has some big near-term support at around $38 a share.

If you’re bullish on WPRT, I would look for long-biased trades following its report if the stock does not breach that near-term support zone at $38 with heavy volume. As long as that level holds, and at worst case its 50-day moving average of $37.42 holds, then I would be stalking this for long biased trades. I would get especially bullish if it breaks out above $44 to $45.22 a share after earnings with volume. Look for volume that’s near of well above its three-month average action of 1,382,190 shares.

I would only look for short biased trades or avoid WPRT if after earnings the stock takes out those key support zones at $38 and at its 50-day moving average of $37.42 with big volume. If we get that action, I would target a drop back toward $34 to $32 a share, or possibly much lower if the bears continue to blast this stock lower post-earnings.

Westport is one of the top holdings of George Soros, comprising 2.6% of the Soros Fund Management portfolio as of the most recently reported quarter. I also featured it earlier this month in "8 Stocks Rising on Monster Volume."

Quidel

Another earnings short-squeeze idea is Quidel (QDEL), which is set to report results on Wednesday after the market close. This company is engaged in the development, manufacturing and marketing of diagnostic testing solutions. Wall Street analysts, on average, expect Quidel to report revenue of $36.85 million on earnings of 5 cents per share.

If you’re looking for a beaten-down heavily shorted stock heading into earnings, then make sure to take a solid look at shares of Quidel. This stock has been destroyed by the sellers off its October high of $19.09 to a recent low of $14.15 a share. A surprise upside earnings report could easily spark a powerful snapback short covering rally in QDEL post-earnings.

The current short interest as a percentage of the float for Quidel is pretty high at 16.4%. That means that out of the 25.49 million shares in the tradable float, 4.62 million are sold short by the bears. This is a high short-interest/low-float stock, so if we get some positive price action after its report, it could short-squeeze big.

From a technical perspective, QDEL is now trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending from its October high of $19.09 to its current price of $14.50. During that slide lower, QDEL has consistently been making higher lows and lower lows. This means that large traders are dumping this stock at any chance they get. That said, QDEL has firmed up a big recently and found some buying support at around $14.08 to $14.15 a share.

If you’re bullish on QDEL, I would wait until after it reports its results and look for long-biased trades as long as $14.08 isn’t breached with high volume. If that level holds, I would then look for more upside if $15.24 and its 200-day moving average of $15.49 are taken out with volume. Look for volume on that move that hits near or well above its three-month average action of 184,608 shares. Target a move towards $16.20 or much higher if the bulls spark a solid short-squeeze post-earnings.

I would simply avoid any long trades in QDEL or look for short-biased trades if this stock takes out $14.08 with heavy volume after its report. If we get that action, target a drop back towards its next significant support zones at $13 to $12.35 a share, or possibly much lower if the bears sell this stock off hard post-earnings.

Spectrum Pharmaceuticals

One earnings short-squeeze play in the biotechnology and drugs complex is Spectrum Pharmaceuticals (SPPI), which is set to release numbers on Thursday before the market open. This company is engaged in developing and commercializing therapies with a focus primarily in the areas of hematology-oncology and urology. Wall Street analysts, on average, expect Spectrum Pharmaceuticals to report revenue of $52.73 million on earning of 31 cents per share.

If you’re looking for a heavily shorted stock that’s trading within range of a potential breakout post-earnings, then make sure to take a close look at shares of Spectrum Pharmaceuticals. This stock has been uptrending strong heading into the quarter since shares are just two points off its 52-week high of $16 a share.

The current short interest as a percentage of the float for Spectrum Pharmaceuticals is extremely high at 29%. That means that out of the 49.35 million shares in the tradable float, 15.79 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.7%, or by about 2.14 million shares.

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From a technical perspective, SPPI is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trading sideways for the past month and change between $16 on the upside and around $13 on the downside. A move outside of that range post-earnings should set this stock up for its next big trend.

If you’re bullish on SPPI, wait until after earnings and look for long biased trades if the stock breaks out above its 50-day moving average of $14.53 and above some near-term overhead resistance at $14.85 a share with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 1.6 million shares. If we get that action, I would look for SPPI to re-test $16 and potentially take that level out if the bulls gain full control of this stock post-earnings.

I would avoid any long trades or look for short biased trades in SPPI if after earnings this stock fails to move back above its 50-day moving average of $14.53 with strong volume. If we get that action, then SPPI could easily selloff back towards that near-term support at $13 a share, or possibly much lower if the bears whack this down post-earnings.

Siga Technologies

Another earnings short-squeeze play in the biotechnology and drugs complex is Siga Technologies (SIGA), which is set to release numbers on Thursday after the market close. This company develops products for the prevention and treatment of serious infectious diseases, including products for use in defense against biological warfare agents such as smallpox and arena viruses. Wall Street analysts, on average, expect Siga Technologies to report revenue of $20.93 million on earnings of 25 cents per share.

The current short interest as a percentage of the float for Siga Technologies is extremely high at 21.6%. That means that out of the 37.32 million shares in the tradable float, 8.07 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by about 421,000 shares.

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From a technical perspective, SIGA is currently trading above both its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock bottomed back in December at $1.78 and subsequently soared to a recent high of $3.89 a share. Since tapping that high, SIGA has pulled back right to its 50-day moving average of $2.95 a share.

If you’re bullish on SIGA, I would wait until after its report and look for long-biased trades as long as it doesn’t violate its 50-day moving average with heavy volume. Some near-term support sits right below its 50-day at $2.86, so I wouldn’t want to see that level breached with volume after earnings. I would look for long trades if that level holds, and then SIGA takes out some near-term overhead resistance at $3.26 with volume. Look for volume that’s tracking in close to or above its three-month average volume of 578,481 shares. If we get that action, I would target a run back toward that recent high of $3.89 a share, or possibly much higher.

I would simply avoid any long-biased trades in SIGA altogether if this stock takes out its 50-day and that near-term support at $2.86 with big volume. A move below that level with volume after its report could send this stock down toward $2.50 or lower if the bears hammer this stock.

Sunrise Senior Living

My final earnings short-squeeze candidate today is Sunrise Senior Living (SRZ), which is set to release numbers on Thursday after the market close. This company is a provider of senior living services in the U.S., Canada and the U.K. Wall Street analysts, on average, expect Sunrise Senior Living to report revenues of $337.09 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for Sunrise Senior Living is very high at 14.5%. That means that out of the 39.50 million shares in the tradable float, 8.08 million shares are sold short by the bears.

From a technical perspective, SRZ is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading range bound for the past month between $8.38 and around $7.50 a share. A high-volume move outside of that range should set up the next big trend for SRZ post-earnings.

If you’re bullish on SRZ, I would wait until after it reports earnings and consider long-biased trades if the stock triggers a near-term breakout above $8.38 with high-volume. Look for volume that registers near or well above its three-month average volume of 627,023 shares. If we get that action, this stock has a great chance of making a run at $10 to $11 a share post-earnings.

I would look only for short-biased trades or avoid SRZ after earnings if it fails to break out and then trades below some near-term support at $7.50 with volume. If we see that action, I would target a drop back towards its 200-day moving average of $6.91, or down to its next major support zones at $6.50 to $6 a share.

To see more potential earnings short squeeze plays, including Motricity (MOTR), Quepasa (QPSA) and Ascena Retail Group (ASNA), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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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.