Stock Quotes in this Article: FAST, FDO, OZRK, PIR, RAD

WINDERMERE, Fla. (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.

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.

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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 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.

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Pier 1 Imports

My first earnings short-squeeze trade is specialty retailer of decorative home furnishings and gifts Pier 1 Imports (PIR), which is set to release numbers on Thursday before the market opens. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $551.44 million on earnings of 60 cents per share.

The current short interest as a percentage of the float for Pier 1 Imports is notable at 7.5%. That means that out of the 90.07 million shares in the tradable float, 6.77 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 if the bulls get the earnings news they’re looking for.

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From a technical perspective, PIR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently spiked back above its 50-day moving average of $22.43 a share, and it’s now quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on PIR, 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 $23.45 to $23.67 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.13 million shares. If that breakout hits, then PIR will set up to enter new 52-week high territory above $23.67, which is bullish technical price action. Some possible upside targets off that breakout are $26 to $30 a share.

I would simply avoid PIR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $22.43 a share and then below some more key near-term support at $21.20 a share with high volume. If we get that move, then PIR will set up to re-test or possibly take out its next major support level at its 200-day moving average of $19.67 to $19 a share.

Rite Aid

Another potential earnings short-squeeze play is retail drugstore chain operator in the U.S. Rite Aid (RAD), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.45 billion on a loss of 2 cents per share.

During the last quarter, this company reported revenue of $6.24 billion and GAAP reported sales were 1.2% lower than the prior-year quarter’s $6.31 billion.

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The current short interest as a percentage of the float for Rite Aid stands at 6.4%. That means that out of the 703.15 million shares in the tradable float, 45.47 million shares are sold short by the bears. This is more than enough bears to spark a solid short-covering rally if Rite Aid delver’s strong earnings news the bulls like.

From a technical perspective, RAD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently started to bounce right off its 50-day moving average of $1.72 a share, and that move is pushing the stock within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on RAD, 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 $1.80 to $1.95 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 10.52 million shares. If that breakout his, then RAD will set up to enter new 52-week-high territory above $1.95, which is bullish technical price action. Some possible upside targets off that breakout are $2.20 to $2.50 a share.

Bank of the Ozarks

One potential earnings short-squeeze candidate in the regional banking complex is Bank of the Ozarks (OZRK), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $59.33 million on earnings of 55 cents per share.

The current short interest as a percentage of the float for Bank of the Ozarks is pretty high at 11.8%. That means that out of the 30.93 million shares in the tradable float, 3.65 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they’re looking for, then shares of OZRK could rip higher post-earnings.

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From a technical perspective, OZRK is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently sold off from its 52-week high of $45.16 to its low of $41.23 a share. So far, the 50-day moving average of $40.17 for OZRK has not been broken off that recent pullback.

If you’re bullish on OZRK, then I would wait until after its report and look for long-biased trades as long as this stock is trending above its 50-day at $40.17, and then once it breaks out above some near-term overhead resistance levels at $44 to $45.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 156,533 shares. If we get that breakout, then OZRK will set up to enter new 52-week-high territory above $45.16, which is bullish technical price action. Some possible upside targets off that move are $50 to $52.

I would avoid OZRK 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 at $41.23 a share and then below its 50-day at $40.17 a share with high volume. If we get that move, then OZRK will set up to re-test or possibly take out its next major support levels $38 to $36 a share.

Family Dollar Stores

Another earnings short-squeeze prospect is self-service retail discount store operator Family Dollar Stores (FDO), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Family Dollar Stores to report revenue of $2.89 billion on earnings of $1.23 per share.

During the last quarter, this company reported revenue of $2.42 billion and GAAP reported sales were 13% higher than the prior-year quarter’s $2.15 billion. Also during the last quarter, EPS was 69 cents per share, which was 1.5% higher than the prior-year quarter’s 68 cents per share.

The current short interest as a percentage of the float for Family Dollar Stores stands at 4.3%. That means that out of the 87.68 million shares in the tradable float, 4.8 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to send shares of FDO sharply higher post-earnings if the bulls get the earnings news they’re looking for.

From a technical perspective, FDO is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has recently started to bounce right off its 50-day moving average of $57.80 and it’s now quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on FDO, 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 $59.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.66 million shares. If that breakout triggers, then FDO will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $63 to $64.11 a share.

I would avoid FDO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $57.80 a share and then below some key near-term support at $57.50 a share with high volume. If we get that move, then FDO will set up to re-test or possibly take out its next major support levels at $56 to $54 a share.

Fastenal

My final earnings short-squeeze trade idea is industrial and construction supplies retailer Fastenal (FAST), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue of $815.10 million on earnings of 37 cents per share.

The current short interest as a percentage of the float for Fastenal sits at 6.5%. That means that out of the 271.81 million shares in the tradable float, 17.77 million shares are sold short by the bears. This isn’t a giant short interest, but it’s more than enough to send shares of FAST sharply higher post-earnings if the company gives the bulls the earnings news they’re looking for.

From a technical perspective, FAST is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last month and change, with shares dropping from its high of $53.38 to its recent low of $48.33 a share. During that downtrend, shares of FAST have been mostly making lower highs and lower lows, which is bearish technical price action. That said, FAST has started to bounce off that $48.33 low, and it’s now quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on FAST, 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 at $50.79 a share and then above more resistance at $51.70 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.58 million shares. If that breakout triggers, then FAST will set up to re-test or possibly take out its 52-week high at $53.83 a share. Any high-volume move above $53.83 will put FAST within range of hitting $55 to $60 a share.

I would simply avoid FAST 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 at $48.33 a share with high volume. If we get that move, then FAST will set up to re-test or possibly take out its next major support level at its 200-day moving average of $44.81 a share or at $42 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 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 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.