Stock Quotes in this Article: ACTG, CMG, TZOO, UA, RH

MADISON, 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.

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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Acacia Research

My first earnings short-squeeze play trade is Acacia Research (ACTG), an acquirer, developer, licenser and enforcer of patented technologies, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Acacia Research to report revenue of $58.68 million on earnings of 42 cents per share.

The current short interest as a percentage of the float for Acacia Research sits at 3.3%. That means that out of the 43.91 million shares in the tradable float, 1.59 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.3%, or by about 35,000 shares. This isn’t a huge short interest, but it’s more than enough to spark a solid short-covering rally if ACTG delivers the earnings news the bulls are looking for.

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From a technical perspective, ACTG 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 five months, with shares moving higher from its low of $19.86 a share to its recent high of $32.59 a share. During that uptrend, shares of ACTG have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ACTG within range of triggering a major breakout trade post-earnings.

If you’re bullish on ACTG, 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 $30.74 to $32.59 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 550,000 shares. If that breakout hits, then ACTG will set up to re-test or possibly take out its next major overhead resistance levels at $40 to $42.50 a share.

I would simply avoid ACTG 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 $28.49 to its 200-day at $27.35 a share with high volume. If we get that move, then ACTG will set up to re-test or possibly take out its next major support levels at $26.33 to $24.52 a share.

Travelzoo

Another potential earnings short-squeeze trade is global Internet media player Travelzoo (TZOO), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Travelzoo to report revenue of $41.23 million on earnings of 34 cents per share.

The current short interest as a percentage of the float for Travelzoo is pretty high at 11%. That means that out of the 6.86 million shares in the tradable float, 868,000 shares are sold short by the bears. This stock sports a decent short interest and an extremely low tradable float. If the bulls get the earnings news they’re looking for, then we could easily see a monster short-squeeze develop for shares of TZOO post-earnings.

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From a technical perspective, TZOO is currently trending right at its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been trading in a tight consolidation pattern for the last two months and change, with shares moving between $20.22 on the downside and $22.72 on the upside. A high-volume move above the upper end of its recent range could trigger a big breakout trade for shares of TZOO.

If you’re in the bull camp on TZOO, 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 $22.35 to $22.72 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 126,000 shares. If that breakout hits, then TZOO will set up to re-test or possibly take out its next major overhead resistance levels at $24.47 to $27.94 a share. If those levels get taken out with volume, then TZOO could even trend above $30 a share.

I would simply avoid TZOO 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 $21.10 to $20.94 a share and then once it takes out more support at $20.22 a share with high volume. If we get that move, then TZOO will set up to re-test or possibly take out its next major support levels at $18.60 to $17.50 a share.

Under Armour

One potential earnings short-squeeze candidate is sporting apparel, footwear and accessories player Under Armour (UA), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Under Armour to report revenue of $467.57 million on earnings of 3 cents per share.

On Monday, Susquehanna upgraded its rating on shares of Under Armour to positive from neutral. The current short interest as a percentage of the float for Under Armour is very high at 17.4%. That means that out of the 79.70 million shares in the tradable float, 13.82 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.3%, or by about 813,000 shares. If the bears are caught pressing their bets into a strong quarter, then we could easily see shares of UA soar higher post-earnings.

From a technical perspective, UA 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 month, with shares soaring higher from its low of $46.31 to its recent high of $58.52 a share. During that uptrend, shares of UA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UA within range of triggering a major breakout trade post-earnings.

If you’re bullish on UA, 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 $58.52 to $60.20 a share and then once it takes out its 52-week high at $60.96 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.72 million shares. If we get that breakout, then UA will set up to enter new 52-week-high territory above $60.96, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $80 a share.

I would avoid UA 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 $55 to $54 a share with high volume. If we get that move, then UA will set up to re-test or possibly take out its 200-day at $52.14 a share or its 50-day at $50.65 a share.

Restoration Hardware

Another earnings short-squeeze prospect is home furnishings player Restoration Hardware (RH), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $390.86 million on earnings of 60 cents per share.

On Monday, Wells Fargo initiated coverage on Restoration Hardware with an outperform rating. The current short interest as a percentage of the float for Restoration Hardware is extremely high at 32.3%. That means that out of the 20.88 million shares in the tradable float, 1.37 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could send shares of RH ripping higher post-earnings.

From a technical perspective, RH is currently trending below its 50-day moving average, which is bearish. This stock has been trending sideways for the last month, with shares moving between $33.02 on the downside and $36.49 on the upside. A high-volume move above the upper-end of its recent range could trigger a breakout trade for RH post-earnings.

If you’re bullish on RH, 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 $35.75 to $36.49 a share and then once it clears its 50-day at $36.83 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 95,000 shares. If that breakout triggers, then RH will set up to re-test or possibly take out its next major overhead resistance levels at $39.50 to its all-time high at $40.45 a share.

I would avoid RH 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 $33.95 to $33.02 a share with high volume. If we get that move, then RH will set up to re-test or possibly take out its next major support levels at $31.60 to $30.92 a share.

Chipotle Mexican Grill

My final earnings short-squeeze play today is restaurant operator Chipotle Mexican Grill (CMG), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Chipotle Mexican Grill to report revenue of $724.77 million on earnings of $2.14 per share.

On Monday, David Palmer of UBS said in a client note that marketing and components like Chipotle’s catering business should help to increase sales, whereas in the past the company was more reliant on the strength of its brand and opening more locations. Palmer raised his rating on the stock to buy from neutral and raised his price target to $390 from $330.

The current short interest as a percentage of the float for Chipotle Mexican Grill is pretty high at 12.2%. That means that out of the 30.52 million shares in the tradable float, 3.71 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily send shares of CMG skyrocketing higher post-earnings.

From a technical perspective, CMG 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 six months, with shares soaring higher from its low of $233.92 to its recent high of $350 a share. During that uptrend, shares of CMG have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CMG within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on CMG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $350 to $351.80 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 591,000 shares. If that breakout triggers, then CMG will set up to re-fill some of its previous gap down zone from last July that started above $400 a share.

I would simply avoid CMG 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 $327.28 to its 50-day at $321.86 a share with high volume. If we get that move, then CMG will set up to re-test or possibly take out its next major support levels at $315.50 to its 200-day at $306.34 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.