Stock Quotes in this Article: CSTR, EXPE, FIO, MLNX, ANGI

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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Fusion-io

My first earnings short-squeeze trade idea is data storage devices player Fusion-io (FIO), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Fusion-io to report revenue of $80.48 million on a loss of 7 cents per share.

Earlier today, Piper Jafffray said its first-quarter channel checks for Fusion-io indicated a modest improvement in enterprise demand with easing competitive pressures on the company. The firm, however, keeps a neutral rating on the stock into the first quarter earnings call. Fusion-io has beat analyst estimates in each of the past four quarters.

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The current short interest as a percentage of the float for Fusion-io is extremely high at 44.7%. That means that out of the 86.11 million shares in the tradable float, 28.8 million shares are sold short by the bears. If Fusion-io can deliver the earnings news the bulls are looking for, then we could easily see a monster short-squeeze for this stock post-earnings.

From a technical perspective, FIO is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has recently started to break out above some near-term overhead resistance levels at $15.37 to $15.59 a share and above its 50-day moving average of $16.14 a share. That move is quickly pushing shares of FIO within range of triggering a major breakout trade post-earnings.

If you’re bullish on FIO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some more near-term overhead resistance levels at $17 to $17.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.66 million shares. If that breakout triggers, then FIO will set up to re-fill some of its previous gap down zone from January that started above $20 a share. This stock could easily hit $22 to $24 if that gap gets filled with strong volume.

I would simply avoid FIO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $16.14 and then below some more near-term support at $15.50 a share with high volume. If we get that move, then FIO will set up to re-test or possibly take out its next major support levels at $14.31 to $13.98 a share. Any move below $13.98 would then push FIO into new 52-week low territory, which is bearish technical price action.

Angie’s List

Another potential earnings short-squeeze play is member-generated ratings and reviews solutions provider Angie’s List (ANGI), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Angie’s List to report revenue of $51.54 million on a loss of 17 cents per share.

Earlier today, Needham said it expects Angie’s List first-quarter results to meet or top its estimates. The firm reiterates its buy rating on the stock and raised its price target ahead of the numbers to $24 from $20.

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The current short interest as a percentage of the float for Angie’s List is very high at 19.8%. That means that out of the 52.05 million shares in the tradable float, 7.68 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or by about 102,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of ANGI could explode higher post-earnings.

From a technical perspective, ANGI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last two months, with shares moving between $18.15 on the downside and $21.16 on the upside. A high-volume move above the upper end of its recent sideways chart pattern could trigger a big breakout trade for shares of ANGI post-earnings.

If you’re in the bull camp on ANGI, 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 $21 to $21.16 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 799,239 shares. If that breakout hits, then ANGI will set up to enter new 52-week-high and all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $27 a share.

I would simply avoid ANGI 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 $19.67 a share to its 50-day at $18.55 a share with high volume. If we get that move, then ANGI will set up to re-test or possibly take out its next major support levels $18.15 to $16 a share. Any high-volume move below $16 will then give ANGI a chance to re-fill its previous gap up zone from February that started just below $14 a share.

Coinstar

Another potential earnings short-squeeze candidate is automated retail solutions provider Coinstar (CSTR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Coinstar to report revenue of $579.41 million on earnings of 86 cents per share.

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The current short interest as a percentage of the float for Coinstar is extremely high at 48.1%. That means that out of the 25.90 million shares in the tradable float, 13.21 million shares are sold short by the bears. This is a monster short interest on a stock with a relatively low tradable float. Any bullish earnings news from Coinstar could easily set off a large short-squeeze for the stock post-earnings.

From a technical perspective, CSTR is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock recently formed a double top at around $59.16 to $59.31 a share. Following that top, shares of CSTR have dived lower and trended back below its 50-day moving average of $54.89 a share.

If you’re bullish on CSTR, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day at $54.89 a share with strong volume. Look for volume on that move that hits near or above its three-month average volume of 963,660 million shares. If we get that breakout, then CSTR will set up to re-test or possibly take out its next major overhead resistance levels at $58 to $59.31 a share. Any high-volume move above $59.31 will then put $62.50 to $65 into range for shares of CSTR.

I would avoid CSTR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day at $51.37 a share with high volume. If we get that move, then CSTR will set up to re-test or possibly take out its next major support levels $49.68 to $47.25 a share.

Mellanox Technologies

Another earnings short-squeeze prospect is fabless semiconductor player for the storage sector Mellanox Technologies (MLNX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Mellanox technologies to report revenue of $80.77 million on earnings of 4 cents per share.

A few weeks ago, Piper Jaffray raised its price target for Mellanox ahead of the company’s first-quarter results and reiterated its overweight rating on the stock. Piper expects Mellanox to report revenue at the high-end of the guidance range and thinks the company is well positioned for strong growth. The firm raised its price target to $65 from $52.

The current short interest as a percentage of the float for Mellanox Technologies is extremely high at 21.6%. That means that out of the 37.11 million shares in the tradable float, 6.92 million shares are sold short by the bears. This is a high short interest low float situation, so any bullish earnings news could easily send shares of MNLX skyrocketing higher post-earnings.

From a technical perspective, MLNX is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month, with shares moving higher from its low of $51.50 to its recent high of $63.09 a share. During that uptrend, shares of MLNX have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MLNX within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on MLNX, 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 $63.09 to $65.77 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.15 million shares. If that breakout triggers, then MLNX will set up to re-test or possibly take out its next major overhead resistance levels at $72 to its 200-day at $76.29 a share. Any high-volume move above its 200-day will then put $85 into range for shares of MLNX.

I would avoid MLNX 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 of $55.67 a share and then below more support at $54.91 a share with high volume. If we get that move, then MLNX will set up to re-test or possibly take out its next major support levels at $51.50 to $49.84 a share. Any high-volume move below $49.84 will then put $45 or lower into range for shares of MLNX.

Expedia

My final earnings short-squeeze play idea today is online travel player Expedia (EXPE), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Expedia to report revenue of $965.73 million on earnings of 23 cents per share.

The current short interest as a percentage of the float for Expeida is notable at 8.3%. That means that out of the 104.98 million shares in the tradable float, 8.85 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then shares of EXPE could easily see a sharp rally higher post-earnings.

From a technical perspective, EXPE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has recently started to trend back above its 50-day moving average at $63.44 a share. That move is quickly pushing shares of EXPE within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on EXPE, 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 $65.39 to $66.93 a share and then once it takes out its 52-week high at $68.09 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.23 million shares. If that breakout triggers, then EXPE will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $80 to $90 a share.

I would simply avoid EXPE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $63.44 a share and then below some more key near-term support at $62 a share with high volume. If we get that move, then EXPE will set up to re-test or possibly take out its next major support levels at $60.16 to $59.50 a share. Any high-volume move below those levels will then put its 200-day at $58.25 into range for shares of EXPE.

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

-- Written by Roberto Pedone in Madison, Wis.

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

Roberto Pedone, based out of Madison, 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.