Stock Quotes in this Article: SGEN, SMBL, TSLA, LNKD, ZIP

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and 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 manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout 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.

     

    Tesla Motors

    My first earnings short-squeeze candidate today is electric vehicle maker Tesla Motors (TSLA), which is set to report its results on Wednesday after the market close. Wall Street analysts, on average, expect Tesla Motors to report revenue of $47.28 million on a loss of 59 cents per share.

    The company’s CEO, Elon Musk, recently said that the Tesla’s Model S sedan is sold out of next year’s production, and the company should earn a profit in 2013. The stock is trending very strong heading into the quarter, with shares bounced big off of support at $22 to $23 a share in September to its current price of around $28.50.

    The current short interest as a percentage of the float for Tesla Motors is an extremely large 47.8%. That means that out of the 54.98 million shares in the tradable float, 23.59 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 7.4%, or about 1.61 million shares.

    From a technical standpoint, this stock is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock now sets up for a big breakout post-earnings if the company can deliver some solid results and bullish guidance.

    If you’re bullish on this stock, I would buy the stock after it reports earnings if it manages to break out over $31.50 to $32.86 a share with solid volume. Look for volume that’s tracking in close to or above its three-month average volume of 1.029 million shares. If that breakout triggers, then I would target a run back towards its 52-week high of $36.42, or possibly even higher if the bulls kickoff a big short squeeze.
    I would only get short this stock after they report if it drops below $27 a share on heavy volume. I would then add to any short position once the stock takes out its 200-day of $25.92 and 50-day of $25.81 on solid volume. Target a drop back toward $24 a share or possibly even lower if the bears hammer this stock post-earnings.

    Tesla is one of TheStreet Ratings' top-rated automobile stocks.

    LinkedIn

    Another stock with the potential to see an earnings short squeeze is professional network Web site operator LinkedIn (LNKD), which is set to release results on Thursday after the market close. Wall Street analysts, on average, expect LinkedIn to report revenue of $127.35 million on a loss of 4 cents per share.

    This company beat Wall Street estimates last quarter after it reported net income of 5 cents per share versus estimates of a net loss of 4 cents per share. If we see another earnings beat and a guidance raise, then this heavily shorted stock could easily get squeezed following its report.

    The current short interest as a percentage of the float for Link stands at 32.1%. That means that out of the 5.31 million shares in the tradable float 2.88 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 23.9%, or by about 556,300 shares. The bears are pressing into the quarter with their bets, so if the bulls get what they want, then look for a tradable short covering rally to develop.

    From a technical standpoint, this stock is currently trading above its 50-day moving average, which is bullish. The stock recently found some big buying support at around $70.75 a share and it ran up to a near-term high of $95. For the past month, the stock has been trading between $95 and around $82.50 a share. A move outside of that range will likely set this stock up for its next big trend.

    If you’re bullish on this name, I would look to buy the stock after they release earnings once it breaks out above $95 a share on heavy volume. Look for volume that’s tracking in close to or above its average volume of 685,000 shares. If we get that breakout, then target a run back towards $110 or possibly even higher if the bulls gain full control.

    I would only short this stock after earnings if it drops below its 50-day moving average of $82.45 a share on heavy volume. I would target a drop back toward $75 to $70 a share if the bears knock this stock lower post-earnings.

    I also featured LinkedIn, a holding in Tiger Global Management's portfolio, in "11 Stocks to Play the Groupon IPO."

    Seattle Genetics

    One earnings short-squeeze play in the biotechnology complex is Seattle Genetics (SGEN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Seattle Genetics to report revenue of $13.57 million on a loss of 46 cents per share.

    During the last quarter, the company missed estimates by 6 cents, after reporting a loss of 45 cents per share versus Wall Street estimates of a net loss of 39 cents per share. For the first quarter, Seattle Genetics beat Wall Street estimates by 6 cents. Revenue has dropped for the past three straight quarters. Revenue fell 64.6% in the second quarter, 73.8% in the first quarter of last year and by 62.6% in the fourth quarter of last year.

    The current short interest as a percentage of the float for Seattle Genetics is an extremely large 22.4%. That means that out of the 113.13 million shares in the tradable float, 25.28 million are sold short by the bears. With a short interest this high, any good news will set off a big short squeeze for SGEN.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock just made a huge run from its August low of $12.29 a share to its current price of just under $22 a share. The stock now sets up for a big breakout off any bullish earnings news.

    If you want to play this stock for an earnings short-squeeze play, I would look to be a buyer after they report once it breaks out above $22.37 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 2.42 million shares. A breakout above that level will push this stock into all-time high territory.

    I would only look to short this name after they report their earnings if the stock fails to breakout and drops back below $20 to $19.33 a share (its 50-day) on heavy volume. I would target a fall back down towards $17.50 to $16 a share if the bears whack this lower post-earnings.

    Seattle Genetics shows up on lists of the 10 Most Shorted Stocks in Biotech and 11 Biotech Stocks Loved or Hated by Hedge Funds.

    Smart Balance

    One earnings short-squeeze play in the food processing sector is marketer of functional food products Smart Balance (SMBL), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Smart Balance to report revenue of $71.91 million on earnings of 5 cents per share.

    If you’re looking for a stock that’s trending very strong heading into the quarter, then take a look at Smart Balance. This stock is currently trading at around $6.30 which is very close to its 52-week high of $7.15 a share.

    The current short interest as a percentage of the float for Smart Balance stands at 4.8%. That means that out of the 48.87 million shares in the tradable float, 2.68 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a short-covering rally if the bulls get what they’re looking for.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out over $5.60 to $5.74 a share and made a solid run to is 52-week high of $7.15. Traders should now look to play the next breakout after earnings if the company can deliver a solid quarter.

    If you’re bullish on this stock, I would wait until after its report and buy the stock once it breaks out over $7 to $7.15 share on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 394,900 shares. If we see that breakout, then target a run toward $8.50 to $9 a share or possibly even higher if the bulls gain full control of this stock post-earnings.

    Smart Balance, which I also featured as one of several stocks under $10 setting up to trade higher, was on a list of Stocks Favored by Trend-Bucking Funds.

    Zipcar

    My final earnings short squeeze idea for today is car sharing network provider Zipcar (ZIP), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zipcar to report revenue of $68 million on a loss of 1 cent per share.

    During the last quarter, Zipcar reported a loss of 17 cents per share, compared with Wall Street estimates for a net loss of 22 cents per share, beating estimates after coming up short for the previous quarter. For the first quarter, the company missed estimates by 68 cents.

    The current short interest as a percentage of the float for Zipcar is a very large 27.5%. That means that out of the 15.75 million shares in the tradable float, 6.86 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 17%, or by around 998,100 shares. With the shorts pressing their bets into the quarter, any good news could easily spark a large short-squeeze.

    From a technical standpoint, the stock is currently trading above its 50-day moving average, which is bullish. That said, the stock has dropped sharply from its August high of $25.88 to a recent low of $16.50 a share. After hitting that low, the stock found buying support and rebounded to its current price of just over $19 a share. This stock now sets up for a big breakout off any positive earnings news.

    I would look to be a buyer of this stock after earnings if it can manage to break out above $21.50 to $22.08 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 348,850 shares. If we get that breakout, then target a run back towards $25.88 or possibly even higher.

    I would only get short this stock after earnings if it drops below the 50-day moving average of $18.69 on heavy volume. I would then add to any short position if the previous support level at $16.50 (its all-time low) gets taken out to the downside by the bears.

    To see more potential earnings short squeeze candidates, including Skyworks Solutions (SWKS), Affymetrix (AFFX) and Ariad Pharmaceuticals (ARIA), 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.