Stock Quotes in this Article: ARUN, JCP, KSS, YOKU, VNET

 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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Kohl's

My first earnings short-squeeze play is family-oriented department stores player Kohl's (KSS), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Kohl's to report revenue of $4.29 billion on earnings of 58 cents per share.

During the last quarter, Kohl's reported revenue of $6.34 billion, and GAAP reported sales were 5.4% higher than the prior-year quarter's $6.02 billion. EPS for the last quarter was $1.66 and GAAP EPS was $1.66, which was 7.8% lower than the prior-year quarter's $1.80 per share.

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The current short interest as a percentage of the float for Kohl's is notable at 7%. That means that out of the 212.66 million shares in the tradable float, 14.59 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.7%, or by about 390,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of KSS could soar higher post-earnings.

From a technical perspective, KSS 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 month and change, with shares moving between $46.25 on the downside and $49.30 on the upside. A high-volume move above the upper-end of its recent range could trigger a major breakout trade for KSS post-earnings.

If you're bullish on KSS, 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 $49.03 to $49.34 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.52 million shares. If that breakout triggers, then KSS will set up to re-test or possibly take out its next major overhead resistance levels at $52 to $53 a share, or even $54.50 a share.

I would simply avoid KSS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $47.40 a share with high volume. If we get that move, then KSS will set up to re-test or possibly take out its next major support levels at $46.86 to $45.33 a share.

J.C. Penney

Another potential earnings short-squeeze trade idea is department stores operator J.C. Penney (JCP), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect J.C. Penney to report revenue of $2.72 billion on a loss of 86 cents per share.

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The current short interest as a percentage of the float for J.C. Penney is extremely high at 24.3%. That means that out of the 101.48 million shares in the tradable float, 50.57 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of JCP could easily skyrocket higher post-earnings.

From a technical perspective, JCP is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $13.55 to its recent high of $19.03 a share. During that move, shares of JCP have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JCP within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on JCP, 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 $19.03 to its 200-day moving average at $20.34 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 20.05 million shares. If that breakout hits, then JCP will set up to re-test or possibly take out its next major overhead resistance levels at $22 to $23 a share. Any high-volume move above $23 will then put $26 to $27 into range for shares of JCP.

I would simply avoid JCP or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below some key near-term support at $17 a share with high volume. If we get that move, then JCP will set up to re-test or possibly take out its next major support levels at its 50-day moving average at $15.68 a share to $15 a share.

Youku Tudou

One potential earnings short-squeeze candidate is Internet television player in China Youku Tudou (YOKU), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Youku Tudou to report revenue of $510.81 million on a loss of $1.39 per share.

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The current short interest as a percentage of the float for Youku Tudou is pretty high at 7.6%. That means that out of the 116.68 million shares in the tradable float, 10.94 million shares are sold short by the bears. This is a decent short interest, so if the bulls get the earnings news they're looking for we could easily see shares of YOKU take off to the upside post-earnings.

From a technical perspective, YOKU 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 few weeks, with shares moving between $18.78 on the downside and $20.64 on the upside. A high-volume move above the upper-end of its recent range could trigger a near-term breakout trade for shares of YOKU post-earnings.

If you're bullish on YOKU, 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 $20.64 to $21.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.14 million shares. If we get that breakout, then YOKU will set up to re-test or possibly take out its next major overhead resistance levels at $23 to $25 a share.

I would avoid YOKU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day at $18.74 and its 50-day at $17.87 a share with high volume. If we get that move, then YOKU will set up to re-test or possibly take out its next major support levels at $16.53 to $15.54 a share.

Aruba Networks

Another earnings short-squeeze prospect is Aruba Networks (ARUN), a provider of next-generation network access solutions for mobile enterprise networks, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Aruba Networks to report revenue of $154.59 million on earnings of 15 cents per share.

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During the last quarter, Aruba Networks reported revenue of $155.4 million and GAAP reported sales were 23% higher than the prior-year quarter's $126.3 million. Non-GAAP EPS was 22 cents per share last quarter and GAAP EPS was 4 cents per share, versus -11 cents per share for the prior-year quarter.

The current short interest as a percentage of the float for Aruba Networks is extremely high at 21.2%. That means that out of the 108.91 million shares in the tradable float, 22.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.6%, or by about 129,000 shares. If the short-sellers are caught pressing their bets into a strong quarter, then we could easily shares of ARUN rip higher post-earnings.

From a technical perspective, ARUN is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down sharply from $22 to $16.77 a share with heavy downside volume. Following that move, shares of ARUN have started to bounce higher off of oversold levels, since its current relative strength index reading is 28.56. Oversold can always get more oversold, but ARUN is now trending within range of triggering a near-term breakout trade.

If you're bullish on ARUN, 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 $17.98 to $18 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.84 million shares. If that breakout triggers, then ARUN will set up to re-fill some of its previous gap down zone that started at $22 a share.

I would avoid ARUN 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 $17.05 to $16.77 a share with high volume. If we get that move, then ARUN will set up to re-test or possibly take out its next major support levels at $16 to $14 a share.

21Vianet Group

My final earnings short-squeeze play today is carrier-neutral Internet data center services provider in China 21Vianet Group (VNET), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect 21Vianet Group to report revenue of $70.03 million on earnings of 12 cents per share.

The current short interest as a percentage of the float for 21Vianet Group sits at 4.2%. That means that out of the 43.15 million shares in the tradable float, 1.90 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally if VNET can deliver the earnings news the bulls are looking for.

From a technical perspective, VNET is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending decent for the last month, with shares moving higher from its low of $8.52 to its recent high of $9.80 a share. During that uptrend, shares of VNET have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of VNET within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on VNET, 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 $9.80 to its 200-day at $9.95 a share and $10.14 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 248,841 shares. If that breakout triggers, then VNET will set up to re-test or possibly take out its next major overhead resistance levels at $10.56 to $12 a share.

I would simply avoid VNET or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $9.13 a share with high volume. If we get that move, then VNET will set up to re-test or possibly take out its next major support levels at $8.65 to its 52-week low at $8.39 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 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.