Stock Quotes in this Article: ACFN, FDS, KBH, VRA, XONE

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.

Acorn Energy

My first earnings short-squeeze trade idea is Acorn Energy (ACFN), which, through its subsidiaries, provides technology-driven solutions for energy infrastructure asset management worldwide. Acorn is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect it to report revenue of $6.03 million on a loss of 23 cents per share.

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The current short interest as a percentage of the float for Acorn Energy is very high at 12.9%. That means that out of the 19.11 million shares in the tradable float, 2.47 million shares are sold short by the bears. This is a high short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of ACFN could explode sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, ACFN is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently formed a triple bottom chart pattern at $3.16, $3.25 and $3.29 a share. Shares of ACFN are now starting to trend within range of triggering a near-term breakout trade post-earnings.

If you're bullish on ACFN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $3.69 a share to more near-term overhead resistance at $3.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 197,326 shares. If that breakout materializes after earnings, then ACFN will set up to re-test or possibly take out its next major overhead resistance levels at $4.30 to $4.65 a share. Any high-volume move above those levels will then give ACFN a chance to tag its 200-day moving average of $5.36 a share.

I would simply avoid ACFN 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 $3.29 to $3.16 a share with high volume. If we get that move, the ACFN will set up to re-test or possibly take out its next major support level at its 52-week low of $2.85 a share.

Vera Bradley

Another potential earnings short-squeeze play is Vera Bradley (VRA), a designer, producer, marketer and retailer of accessories for women, which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Vera Bradley to report revenue $146.86 million on earnings of 46 cents per share.

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The current short interest as a percentage of the float for Vera Bradley is extremely high at 51.89%. That means that out of the 21.56 million shares in the tradable float, 11.19 million shares are sold short by the bears. This is a monster short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-covering rally post-earnings for shares of VRA as the bears jump to cover some of their trades.

From a technical perspective, VRA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months, with shares moving higher from its low of $21.85 to its recent high of $28.60 a share. During that move, shares of VRA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of VRA within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on VRA, 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 $28 to its 52-week high at $28.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 433,295 shares. If that breakout gets underway, then VRA will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $35 to $40 a share.

I would simply avoid VRA 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 $26.34 to $25.96 a share and then once it takes out its 50-day at $25.21 a share with high volume. If we get that move, then VRA will set up to re-test or possibly take out its next major support levels its 200-day moving average of $22.84 a share to $20 a share.

FactSet Research Systems

Another potential earnings short-squeeze candidate is integrated financial and analytical applications provider FactSet Research Systems (FDS), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $226.36 million on earnings of $1.21 per share.

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The current short interest as a percentage of the float for FactSet Research Systems is pretty high at 15.6%. That means that out of the 39.66 million shares in the tradable float, 6.20 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.5%, or by about 379,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of FDS could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, FDS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit for the last month and change, with shares moving higher from its low of $101.07 to its recent high of $106.84 a share. During that uptrend, shares of FDS have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FDS within range of triggering a big breakout trade post-earnings.

If you're bullish on FDS, 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 $106.84 to $109.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 397,418 shares. If that breakout hits, then FDS will set up to re-test or possibly take out its next major overhead resistance levels at $115 to its 52-week high at $119.08 a share.

I would avoid FDS 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 $103.05 to $100 a share with high volume. If we get that move, then FDS will set up to re-test or possibly take out its next major support levels at $95 to $87 a share.

ExOne

Another earnings short-squeeze prospect is three-dimensional-printing player ExOne (XONE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect ExOne Inc to report revenue of $12.13 million on earnings of 1 cent per share.

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The current short interest as a percentage of the float for XONE Inc is extremely high at 43.4%. That means that out of the 7.89 million shares in the tradable float, 3.43 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 199,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of XONE could soar sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, XONE is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last few weeks, with shares moving lower from its high of $48.38 to its recent low of $39.26 a share. During that downtrend, shares of XONE have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of XONE have formed a double bottom over the last month at $37.80 to $39.26 a share. If that bottom holds, then shares of XONE could rip higher post-earnings if the company can deliver some bullish news.

If you're bullish on XONE, 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 $42.50 to $45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 577,097 shares. If that breakout hits, then XONE will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $49.65 to its 200-day moving average of $55.44 a share.

I would simply avoid XONE 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 $39.26 to $37.80 a share with high volume. If we get that move, then XONE will set up to re-test or possibly take out its next major support level at $30 a share.

KB Home

My final earnings short-squeeze play is homebuilder KB Home (KBH), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect KB Home to report revenue of $437.09 million on earnings of 9 cents per share.

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The current short interest as a percentage of the float for KB Home is extremely high at 28%. That means that out of the 72.54 million shares in the tradable float, 20.31 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of KBH could rip sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, KBH is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last few weeks, with shares moving lower from its high of $20.78 to its recent low of $17.09 a share. During that downtrend, shares of KBH have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of KBH have now started to find some buying interest near some previous support levels at around $17 a share.

If you're in the bull camp on KBH, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $17.96 a share to its 50-day moving average of $18.54 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 4.12 million shares. If that breakout hits, then KBH will set up to re-test or possibly take out its next major overhead resistance levels at $20.78 to $22 a share, or even its 52-week high at $25.14 a share.

I would avoid KBH 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 $17.09 to $16.36 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support levels $15.50 to $13 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.