Stock Quotes in this Article: CSTR, IMAX, STMP, TQNT, VPHM

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

----------------------------------------------------------

More From Stockpickr

  • 3 Cheap Dow Stocks Poised to Rebound in 2012
  • 5 Stocks Under $10 With Big Upside Potential
  • 4 Banks You Should Buy in This Market
  • ----------------------------------------------------------

    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’s only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.

    Yesterday, we looked at five stocks set to soar off strong earnings. Here’s a look at several more stocks that could experience big short squeezes when they report earnings this week.

    TriQuint Semiconductor

    My first earnings short-squeeze trade is semiconductor maker TriQuint Semiconductor (TQNT), which is set to report its results on Wednesday after the market close. Wall Street analysts, on average, expect TriQuint Semiconductor to report revenue of $214.15 million on earnings of 10 cents per share.

    This company has seen its profit trend higher year over year by an average of more than threefold over the past five consecutive quarters. The stock has run up big in front of the quarter after investors piled into the stock when it was discovered that their radio frequency chips are being used in the new iPhone 4S.

    The current short interest as a percentage of the float for TriQuint Semiconductor is worth mentioning at 5.9%. That means that out of the 163.73 million shares in the tradable float, 9.67 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 2.8%, or by about 265,800 shares.

    >>Semiconductor Stocks Liked by Hedge Funds

    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. Until recently, this stock had been stuck in a nasty downtrend since May, when it was trading at over $14 a share. During that downtrend, the stock had been doing nothing but making lower highs and lower lows, which is bearish. That said, earlier this month, the stock spiked big from $4.66 a share to a recent high of $7.76 a share on monster volume.

    I would look to buy TriQuint after it reports earnings if the stock can manage to breakout above some past overhead resistance at $7.76 to $8.27 a share with solid volume. Look for volume that’s tracking in close to or above its three-month average volume of 6.5 million shares. If we get the breakout post-earnings, then target a run back towards the 200-day moving average of $10.56 a share.

    I would avoid this stock from the long side if TQNT drops below its 50-day moving average of $6.46 a share post-earnings.

    >>Top-Rated Semiconductor Stocks

    Imax

    Another stock with the potential to see an earnings short squeeze is motion picture technologies and presentations player Imax (IMAX), which is set to release results on Thursday before the market open. Wall Street analysts, on average, expect Imax to report revenue of $67.86 million on earnings of 20 cents per share.

    If you’re looking for a beaten-down stock ahead of earnings, then definitely take a hard look at Imax. This stock has dropped from its July high of $33.16 a share to a recent low of $12.57 a share. Since hitting that low, the stock has rebounded and now trades at just over $16.50 a share. Any bullish earnings news could easily spike this stock off of its current depressed levels.

    The current short interest as a percentage of the float for Imax stands at 4.8%. That means that out of the 55.52 million shares in the tradable float, 2.66 million are sold short by the bears. This is more than enough bearish bets on Imax to spark a solid short squeeze post-earnings if the company can deliver what the bulls are looking for.

    >>20 Highest-Yielding Media Stocks

    From a technical standpoint, this stock is currently trading below both its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. After plunging from its July highs, shares of IMAX have forming a basing chart pattern between $12.50 on the lower end and $18.71 on the upper end. A move out of this range will most likely spark the next trend for this stock.

    If you’re bullish on Imax, I would look to buy the stock after it releases earnings once it breaks out above $18.18 to $18.71 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average volume of 858,200 shares. A move above those overhead resistance levels could spark a run in this stock back towards its 200-day moving average of $25.94 a share.

    I would only short this stock after earnings if it drops below $16.50 a share (50-day moving average) on heavy volume. I would add to any short position once the stock takes out $15 a share and target a drop back towards $13 to $12.50 a share if the bears knock this stock down post-earnings.

    >>5 Breakout Stocks to Leverage the Rally

    Coinstar

    One earnings short-squeeze play in the recreational activities complex is automated retail solutions provider Coinstar (CSTR), one of TheStreet Ratings' top-rated consumer services stocks, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Coinstar to report revenue of $462.05 million on earnings of 88 cents per share.

    This company has reported double-digit year-over-year revenue growth for the past four quarters. Over that timeframe, revenue has grown by an average of 24%. The company has also registered rising profits for three quarters in a row. Many market players are waiting to hear from Coinstar’s management to see if the company was able to steal market share from Netflix (NFLX) through its Redbox product this quarter. If that is indeed the case, then we could see some very bullish guidance when Coinstar reports its numbers.

    The current short interest as a percentage of the float for Coinstar is an extremely large 37.5%. That means that out of the 26.74 million shares in the tradable float, 11.42 million are sold short by the bears. It’s also worth mentioning that the short-sellers have been increasing their bets recently by 2.7%, or by about 301,900 million shares. This massive-short-interest, low-float situation can easily set off a massive short squeeze 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 just found some big buying support at $37.50 to $39 a share, before it ran up to its current price of just over $52 a share. The stock now sets up for a big breakout if we can get some bullish earnings and guidance this week.

    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 $54.65 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 1.25 million shares. If we get that breakout post-earnings, then target a run back towards $60 a share or possibly higher if the shorts get squeeze.

    I would look to short this name after it reports earnings only if the stock fails to break out and drops back below both its 200-day moving average of $47.63 and 50-day moving average of $45.90 on heavy volume. If the stock takes out those levels post-earnings, then target a drop back towards those big previous support zones near $38 a share.

    Coinstar is one of the top holdings of Steven Cohen's SAC Capital and also shows up in the portfolio of Whitney Tilson's T2 Partners.

    Stamps.com

    An earnings short-squeeze play in the catalog and mail order sector is Internet-based postage solutions provider Stamps.com (STMP), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Stamps.com to report revenue of $24.49 million on earnings of 29 cents per share.

    If you’re looking for a stock that’s trading strong heading into its earnings, then make sure to take a look at Stamps.com. This stock is currently trading at around $23.50 a share, which is just a few points off its 52-week high of $26.50 a share.

    The current short interest as a percentage of the float for Stamps.com is a rather large 15.5%. That means that out of the 11.65 million shares in the tradable float, 1.85 million are sold short by the bears. It’s worth pointing out that the bears have increased their short bets dramatically from the last reporting period by 46.2%, or by around 586,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a massive short-squeeze off any bullish earnings news.

    From a technical standpoint, the stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been doing nothing but uptrending for the past three months, with shares making mostly higher lows and higher highs. The stock now sets up to breakout post-earnings if the company can deliver some bullish news.

    >>11 Stocks to Play the Groupon IPO

    If you’re bullish on Stamps.com, I would wait until after its report and buy the stock once it breaks out above $25.65 to $26.50 a share on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 330,600 shares. A high volume move above those levels should spark a big spike in this stock that easily be 10% or higher.

    I would get short this stock after its report only if it drops below its 50-day moving average of $21.15 a share on big volume. A move below that level should set this stock up for a drop back toward $18 a share or possibly even lower if the bears hammer this lower post-earnings.

    ViroPharma

    One more earnings short-squeeze idea is global biotechnology player ViroPharma (VPHM), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect ViroPharma to report revenue of $129.47 million on earnings of 33 cents per share.

    This company failed to meet Wall Street estimates last quarter, so investors will be looking for a better report this time around. VioPharma’s profit has trended higher year-over-year by an average of 88.5% over the past five quarters. Revenues jumped 18.2% last quarter, and sales rose 56.2% to $21.3 million from a year ago.

    This is another stock that’s trending very strong heading into the quarter since shares are currently trading just a few points off its 52-week high of $22.16 a share. A strong earnings report from ViroPharma should set this stock up to breakout post-earnings.

    >>10 Most Shorted Stocks in Biotech

    The current short interest as a percentage of the float for ViroPharma sits at 11.7%. That means that out of the 70.33 million shares in the tradable float, 8.21 million are sold short by the bears. This is a pretty high short interest, so make sure to put this stock on your trading radar for an earnings short-squeeze play.

    From a technical standpoint, the stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock has been uptrending strong since August when it hit a low of $14.62 a share after topping out near $20 a share in July.

    I would look to be a buyer of this stock after earnings if it can manage to break out above $20 to $20.34 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 997,300 shares. If we get that breakout, I would then add to any long position once it takes out its next significant overhead resistance level at $22.16 a share.

    To see more potential earnings short squeeze candidates, including NuVasive (NUVA), Chart Industries (GTLS) and VistaPrint (VPRT), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

    RELATED LINKS:

    >>4 Banks You Should Still Buy in This Market
    >>5 Stocks Setting Up to Break Out

    >>3 Cheap Dow Stocks Poised to Rebound in 2012

    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.