Stock Quotes in this Article: FTK, FXEN, MCP, NVDA, VGZ

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move a stock 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.

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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 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.

    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 by waiting. That’s why it can be worth betting prior to the report -- butonly 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.

     

    Molycorp

    My first earnings short-squeeze candidate is rare earth metals producer Molycorp (MCP), which is set to report its results on Thursday after the market close. Wall Street analysts, on average, expect Molycorp to report revenue of $161.57 million on earnings of 70 cents per share.

    If you’re looking for a beaten-down short-squeeze play in front of earnings, then one name to take a hard look at is Molycorp. This stock dropped from its August high of $66.62 to a recent low of $29.19 a share. Since printing that low, the stock has rebounded a bit and now trades at close to $42 a share.

    The current short interest as a percentage of the float for Molycorp is an extremely large 26%. That means that out of the 51 million shares in the tradable float, 13.45 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 4.2%, or by about 539,800 million shares. This huge short interest, combined with the recently added bearish bets, could easily set off a monster short-squeeze if Molycorp can deliver what the bulls are looking for.

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    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock just yesterday started to break out above some past overhead resistance at $40.53 on strong volume. Volume on Monday registered 5.2 million shares, which is well above its three-month average action of 4.88 million shares. Now the stock is approaching an even bigger breakout if it can manage to move back above its 50-day moving average at $42.25 before the report.

    If you’re bullish on this stock, I would buy the stock after it reports earnings if it manages to trade back above its 50-day moving average of $42.25 on heavy volume. Look for volume that’s tracking in close to or above its three-month average volume. If the stock moves above that level before Thursday, then buy it after earnings off any noticeable strength as long as the 50-day holds and isn’t breached. I would target a run back towards the 200-day moving average of $53.14 if the bulls gain full control of this stock post-earnings.

    I would get short this stock after its report only if it fails to get back above the 50-day or if it trades above the 50-day and then drops back below. Clearly, watching how this stock acts around the 50-day after earnings should be the key to the next big trend for the shares. I would then add to any short position if MCP takes out its near-term support zones at $36.3 to $34.41 on heavy volume. Target a drop back toward $31 to $30 if the bears slam this stock lower post-earnings.

    Flotek Industries

    Another stock with the potential to see an earnings short-squeeze is Flotek Industries (FTK), which is set to release results on Wednesday after the market close. This is a diversified global supplier of drilling and production related products and services to the oil and gas industry. Wall Street analysts, on average, expect Flotek Industries to report revenues of $59.96 million on earnings of 8 cents per share.

    This company missed estimates last quarter after beating estimates in the prior two quarters. During the second quarter, Flotek reported a profit of 4 cents per share against an estimate of 5 cents per share. For the first quarter, the company beat Wall Street estimates by 11 cents. Flotek has registered double-digit year-over-year percentage growth for the past four quarters. Over that timeframe, the company has averaged growth of 81.8%.

    The current short interest as a percentage of the float for Flotek Industries is a rather large 13.2%. That means that out of the 45.78 million shares in the tradable float 6.07 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.2%, or by about 461,300 shares. If the bears are caught leaning too hard into this quarter, then look for a monster short-squeeze to kick off since this stock is trading at just $8 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 was hammered by the sellers from its July high of $10.77 a share to a recent low of $3.89 a share. After hitting that low, the stock has rebounded and started to breakout. On Monday, FTK started to breakout over some past overhead resistance at $7.99 a share on heavy volume.

    If you’re bullish on this name, I would look to buy the stock after they release earnings if any buying strength shows up and it holds above that breakout price of $7.99. If the stock doesn’t move back below $7.99 post-earnings, I would then target a run back toward $10.77 a share or possibly even higher.

    I would avoid trading this stock from the long side after earnings if it fails to stay above $7.99 and if it drops back below its 200-day moving average of $7.44. I would get short on a high-volume drop below the 200-day and target a slide back towards the 50-day at $6.03 or possibly even lower if the bears do a number on this name post-earnings. Any volume over 1.33 million should be considered high.

    I also included Flotek on a recent list of Stocks Under $10 Setting Up to Trade Higher.

    Vista Gold

    An earnings short-squeeze play in the gold and silver complex is Vista Gold (VGZ), which is set to release numbers on Wednesday after the market close. There are currently no analysts’ estimates for Vista Gold on the revenue front, but the company is projected to lose 4 cents per share for this quarter.

    Lofty gold prices and strong demand for the precious metal give Vista Gold a solid chance to report a big quarter. It also doesn’t hurt that the stock is trending extremely strong heading into the report with shares up over 67% so far in 2011.

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    The current short interest as a percentage of the float for VistaGold is notable at 8.9%. That means that out of the 62.40 million shares in the tradable float, 5.86 million 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 439,300 shares. If the bears are caught pressing too hard into this quarter, then look for a big short-squeeze to kickoff if we hear anything from Vista that the bulls like.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has just started to breakout above some past overhead resistance at $3.90 a share.

    If you want to play this stock for an earnings short-squeeze play, I would look to be a buyer after the report on any strength if the stock doesn’t drop back below that breakout level at $3.90. If that level holds, then I expect this stock to re-test its September high of $4.59 a share, or possibly go even higher. Look for volume that’s tracking in close to or above its three-month average action of 1.02 million shares if the stock starts to trend higher above $3.90.

    FX Energy

    An earnings short-squeeze play in the oil and gas exploration and production sector is FX Energy (FXEN), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect FX Energy to report revenue of $9.03 million on a loss of 2 cents per share.

    Shares of FX Energy are setting up for a big breakout post-earnings if the company can report a solid quarter and issue bullish forward guidance. That breakout should really hit if FX Energy can beat estimates and report a profit instead of a loss for this quarter.

    The current short interest as a percentage of the float for FX Energy sits at 9.7%. That means that out of the 49.38 million shares in the tradable float, 4.81 million are sold short by the bears. Since this stock is trading below $10 a share, the high short interest here could spark a big rally in the shares off any bullish earnings news.

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    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock plunged from its July high of $10.27 to a recent low of $3.67 a share. After hitting that low, the stock has rebounded to its current price of just over $6 a share. Shares of FXEN now setup for a breakout trade into and after earnings.

    If you’re bullish on this stock, I would wait until after they report and buy the stock once it breaks out over $6.33 to $6.58 a share on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 625,000 shares. If we see that breakout, then I would add to any long position once the stock moves back above its 200-day moving average of $7.57 on strong volume. Target a run back toward $9 a share if the bulls push this higher post-earning.

    I would only short this stock after earnings if the stock fails to break out and drops below some near-term support at $5.48 and then below its 50-day moving average of $5.17 on heavy volume. Target a drop back toward $4.50 or possibly lower if the bears knock this stock down post-earnings.

    Nvidia

    One more earnings short-squeeze idea play is semiconductor player Nvidia (NVDA), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Nvidia to report revenue of $1.06 billion on earnings of 26 cents per share.

    Revenue growth in the second quarter stopped a three quarter streak of year-over-year revenue decreases. Revenue jumped 25.3% in the second quarter and dropped 4% in the first quarter, 9.8% in the four quarter of last year and 6.6% in the third quarter of last year.

    The current short interest as a percentage of the float NVIDIA is notable at 6.1%. That means that out of the 580.19 million shares in the tradable float, 35.33 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 17.3%, or by around 5.2 million shares.

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    From a technical standpoint, the stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. The stock has been trading in a sideways pattern for the past couple of months, between $11.50 and $16 a share. Since the stock is currently trading near $15, a move outside of that trading range is very possible if NVDA can report bullish earnings and guidance.

    I would look to be a buyer of this stock after earnings if it can manage to break out above $16 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 21.49 million shares. I would then add to any long position once the stock clears its 200-day moving average of $17.03 a share on strong volume. Target a run back towards $20 a share if the bulls gain control of this stock post-earnings.

    I would only get short this stock after earnings if it drops below the 50-day moving average of $14.26 on heavy volume. I would then add to any short position if the stock takes out $13 a share on solid volume. Target a drop back towards $11.50 if the bears hammer this stock post-earnings.

    Nvidia shows up on a list of semiconductor stocks liked by hedge funds for the most recently reported quarter.

    To see more potential earnings short squeeze candidates, including Aurizon Mines (AZK), Green Mountain Coffee Roasters (GMCR) and Homes Inns & Hotels Management (HMIN), 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.