Stock Quotes in this Article: CONN, FINL, GME, WGO, SFXE

DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a 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 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 few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame 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 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 by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

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If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

GameStop

My first earnings short-squeeze play is multichannel video game retailer GameStop (GME), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect GameStop to report revenue of $3.79 billion on earnings of $1.93 per share.

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The current short interest as a percentage of the float for GameStop is extremely high at 28.7%. That means that out of the 113.06 million shares in the tradable float, 32.58 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of GME could easily spike sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, GME is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending a big for the last two months, with shares moving higher from its low of $32.82 to its recent high of $39.85 a share. During that move, shares of GME have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GME within range of triggering a major breakout trade post-earnings.

If you're bullish on GME, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $39.85 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 4.29 million shares. If that breakout hits, then GME will set up to re-fill some of its previous gap-down-day zone from January that started at $45.45 a share. If that gap gets filled with strong volume, then GME could easily tag $50 a share.

I would simply avoid GME or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $36.76 to $36.51 a share high volume. If we get that move, then GME will set up to re-test or possibly take out its next major support levels at $32.82 to $30 a share.

Conns

Another potential earnings short-squeeze trade idea is specialty retailer of durable consumer goods Conns (CONN), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Conns to report revenue $362.63 million on earnings of 78 cents per share.

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The current short interest as a percentage of the float for Conns is extremely high at 22.1%. That means that out of the 29.18 million shares in the tradable float, 6.46 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.4%, or by about 958,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CONN could easily surge sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CONN is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock recently gapped down sharply from $58.34 to $31.88 a share with heavy downside volume. Following that move, shares of CONN have been trending sideways between $31.17 on the downside and $37.04 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of CONN.

If you're in the bull camp on CONN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $37.04 a share to its gap-down-day high of $38.52 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.79 million shares. If that breakout hits, then CONN will set up to re-fill some of its previous gap-down-day zone from February that started at $58.34 a share.

I would simply avoid CONN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $33.23 a share to its 52-week low of $31.17 a share with high volume. If we get that move, then CONN will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets if CONN prints new 52-week lows are $27 to $25 a share.

SFX Entertainment

Another potential earnings short-squeeze candidate is live events and electronic music culture entertainment player SFX Entertainment (SFXE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect SFX Entertainment to report revenue of $112.85 million on earnings of 6 cents per share.

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The current short interest as a percentage of the float for SFX Entertainment is extremely high at 34%. That means that out of the 26.18 million shares in the tradable float, 8.92 million shares are sold short by the bears. This is a high short interest low float situation. Any bullish earnings news could easily send shares of SFXE sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, SFXE is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending badly for the last three months, with shares moving lower from its high of $12.15 to its recent low of $7.60 a share. During that downtrend, shares of SFXE have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of SFXE have started to trend sideways over the last month and change and the stock is now moving within range of triggering a near-term breakout trade.

If you're bullish on SFXE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $8.57 to $8.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 613,932 shares. If that breakout gets underway after earnings, then SFXE will set up to re-test or possibly take out its next major overhead resistance levels at $10 to $11 a share, or even $12 a share.

I would avoid SFXE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $7.92 to $7.60 a share and then once it takes out its all-time low of $7.53 a share with high volume. If we get that move, then SFXE will set up to enter new all-time-low territory, which is bearish technical price action. Some possible downside targets off that move are $6 to $5.50 a share.

Winnebago Industries

Another earnings short-squeeze prospect is recreation vehicle maker Winnebago Industries (WGO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $199.57 million on earnings of 30 cents per share.

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The current short interest as a percentage of the float for Winnebago Industries is notable at 4%. That means that out of the 27.32 million shares in the tradable float, 1.09 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, WGO is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last two months, with shares moving higher from its low of $23.18 to its recent high of $28.90 a share. During that move, shares of WGO have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WGO within range of triggering a near-term breakout trade post-earnings.

If you're bullish on WGO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above it 50-day moving average of $27.75 a share and then once it takes out some more near-term overhead resistance at $28.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 280,628 shares. If that breakout hits, then WGO will set up to re-test or possibly take out its next major overhead resistance levels at $33 to $40 a share.

I would simply avoid WGO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $26.69 a share to its 200-day moving average of $25.88 a share with high volume. If we get that move, then WGO will set up to re-test or possibly take out its next major support levels at $23.18 to $20 a share.

Finish Line

My final earnings short-squeeze play is mall-based specialty retailer Finish Line (FINL), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Finish Line to report revenue of $529.35 million on earnings of 85 cents per share.

The current short interest as a percentage of the float for Finish Line is notable at 7%. That means that out of the 47.88 million shares in the tradable float, 3.39 million shares are sold short by the bears. This is far from a huge short interest, but it's more than enough to spark a sharp short-covering rally post-earnings if the bears get squeezed off any bullish earnings news.

From a technical perspective, FINL is currently trending above both is 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $22.92 to its recent high of $28.69 a share. During that uptrend, shares of FINL have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FINL within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on FINL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $28.69 a share to its 52-week high at $28.86 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 637,637 shares. If that breakout hits, then FINL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40 a share.

I would avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at its 50-day moving average of $27.53 a share to more support at $26.13 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $24.27 to $22.92 a share, or even $20 a share.

To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com.

You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.