Stock Quotes in this Article: ARO, EBIX, KTOS, AH, PERI

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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Accretive Health

My first earnings short-squeeze trade idea is provider of services to health care providers Accretive Health (AH), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Accretive Health to report revenue of $236.87 million on earnings of 9 cents per share.

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The current short interest as a percentage of the float for Accretive Health is rather high at 19.4%. That means that out of the 51.07 million shares in the tradable float, 11.34 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then shares of AH could spike dramatically higher post-earnings.

From a technical perspective, AH is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down big from around $12 a share to its low of $8.55 a share with heavy downside volume. Following that move, shares of AH have started to rebound sharply and re-fill a good portion of that gap, since shares are now trading around $10.85 a share. That move is quickly pushing shares of AH within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on AH, 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 of $11.56 a share and its 50-day at $11.91 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.08 million shares. If that breakout triggers, then AH will set up to re-test or possibly take out its next major overhead resistance levels at $13.54 to $14.19 a share. Any high-volume move above $14.19 will then put this stock in play to re-fill some of its previous gap from last May that started near $18 a share.

I would avoid AH or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below $10 a share with high volume. If we get that move, then AH will set up to re-test or possibly take out its next major support levels at $9.50 to $8.55 a share.

Kratos Defense & Security Solutions

Another potential earnings short-squeeze candidate is Kratos Defense & Security Solutions (KTOS), a specialized national security technology business providing mission-critical products, services and solutions for U.S. national security priorities. Kranos is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect the company to report revenue of $262.28 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for Kratos Defense & Security stands at 9.7%. That means that out of the 44.25 million shares in the tradable float, 4.16 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 147,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of KTOS could explode higher post-earnings.

From a technical perspective, KTOS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last two months, with shares dropping from its high of $5.24 to its recent low of $4.08 a share. During that downtrend, shares of KTOS have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of KTOS have now started to rebound off that $4.08 low, and it’s quickly moving within range of triggering a near-term breakout trade.

If you’re in the bull camp on KTOS, 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 $4.45 to $4.59 a share and then once it takes out more resistance at $4.71 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 352,542 shares. If that breakout triggers, then KTOS will set up to re-test or possibly take out its next major overhead resistance levels at $4.98 to its 200-day at $5.09 a share. Any high-volume move above its 200-day will then put $5.24 to $6 into range for shares of KTOS.

I would avoid KTOS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 52-week low of $4.08 a share with high volume. If we get that move, then KTOS will set up to enter new 52-week low territory, which is bearish technical price action. Some possible downside targets off that move are $3 a share or lower.

Ebix

Another potential earnings short-squeeze play is Ebix (EBIX), a software and e-commerce solutions provider to the insurance industry, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Ebix to report revenue of $54.34 million on earnings of 45 cents per share

The current short interest as a percentage of the float for Ebix is extremely high at 39%. That means that out of the 33.45 million shares in the tradable float, 13.13 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, EBIX is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last month, with shares moving between $16.99 on the upside and around $15 on the downside. A high-volume move above the upper-end of that range post-earnings will likely trigger a major breakout trade for shares of EBIX.

If you’re bullish on EBIX, 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 $15.98 to $16.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 547,455 shares. If that breakout triggers, then EBIX will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $19.24 to $19.84 a share. Any high-volume move above $19.84 will then put $22 to $23 into range for shares of EBIX.

I would avoid EBIX 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 $15 a share with high volume. If we get that move, then EBIX will set up to re-test or possibly take out its next major support levels at $14 to $13 a share.

Aeropostale

Another earnings short-squeeze prospect is specialty retailer of casual apparel and accessories Aeropostale (ARO), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Aeropostale to report revenue of $779.66 million on earnings of 22 cents per share.

The current short interest as a percentage of the float for Aeropostale is rather high at 9.8%. That means that out of the 77.59 million shares in the tradable float, 6.93 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.6%, or by about 666,000 shares. If the bears are caught pressing their bets too strong into a bullish quarter, then we could easily see a solid short-covering rally develop post-earnings.

From a technical perspective, ARO 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, with shares moving higher from its low of $12.45 to its recent high of $14.30 a share. During that uptrend, shares of ARO have been consistently making higher lows and higher highs, which is bullish technical price action. That move is quickly pushing shares of ARO within range of triggering a major breakout trade post-earnings.

If you’re bullish on ARO, 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 $14.30 to its 200-day moving average at $14.61 a share and then once it takes out some past overhead resistance at $14.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.30 million shares. If that breakout triggers, then ARO will set up to re-fill some of its previous gap down zone from last August that started around $20 a share.

I would avoid ARO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $13.27 a share with high volume. If we get that move, then ARO will set up to re-test or possibly take out its next major support levels at $12.45 to $11.91 a share.

Perion Network

My final earnings short-squeeze trade idea today is digital media player Perion Network (PERI), which is set to release numbers on Wednesday before the market open. There are currently no Wall Street analysts’ estimates available for Perion Network.

The current short interest as a percentage of the float for Perion Network is rather high at 10.9%. That means that out of the 6.6 million shares in the tradable float, 1.01 million shares are sold short by the bears. This is a low float and high short interest situation, so any bullish earnings news could easily spark a big move higher for shares PERI post-earnings.

From a technical perspective, PERI 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 trending sideways for the last month and change, with shares moving between $10.35 on the upside and $8.56 on the downside. A high-volume move above the upper-end of that range will likely trigger a major breakout trade for shares of PERI post-earnings.

If you’re in the bull camp on PERI, 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 $9.64 to $10.35 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 416,317 shares. If that breakout triggers, then PERI will set up to re-test or possibly take out its next major overhead resistance levels at $11.65 to $13 a share.

I would simply avoid PERI 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 $9 to $8.56 a share with high volume. If we get that move, then PERI will set up to re-test or possibly take its next major support levels at $7.63 to $6.50 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.