Stock Quotes in this Article: FINL, FRED, GME, TXI, BBRY

 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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BlackBerry

My first earnings short-squeeze trade idea is BlackBerry (BBRY), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue of $2.84 billion on a loss of 29 cents per share.

Just today, Bernstein said it believes BlackBerry will likely surprise on fourth-quarter gross margins driven by BlackBerry 10 units and high margin fees. The firm expects first-quarter guidance to act as another catalyst and notes the company is in a very strong position to start shipping new devices. Bernstein has an outperform rating on the stock and has a $22 price target.

The current short interest as a percentage of the float for BlackBerry is extremely high at 29.8%. That means that out of the 484.84 million shares in the tradable float, 147.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.8%, or by about 10.7 million shares. If the bears are caught pressing their bets into a solid quarter, then we could easily get a monster short-squeeze for BBRY post-earnings.

From a technical perspective, BBRY is currently trending above both its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently sold off hard from its near-term high of $16.82 with high volume, and that selloff pushed the stock back below its 50-day moving average of $14.78 a share. Shares of BBRY have now bounced off its recent low of $13.64 and it’s quickly moving within range of triggering a major breakout trade.

If you’re bullish on BBRY, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 50-day moving average of $14.78 a share and then once it breaks out above some near-term overhead resistance levels at $16.82 to $18.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 65.52 million shares. If that breakout triggers, then BBRY will set up to enter new 52-week-high territory above $18.32, which is bullish technical price action. Some possible upside targets off that move are $20 to $24.

I would avoid BBRY 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 $13.64 a share with high volume. If we get that move, then BBRY will set up to re-test or possibly take out its next major support levels at $12.56 to $12.15 a share.

GameStop

Another potential earnings short-squeeze play is multichannel video game retailer GameStop (GME), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect GameStop to report revenue of $3.45 billion on earnings of $2.09 per share.

Just recently, Wedbush Securities said it’s maintaining its outperform rating on GameStop with a 12-month price target of $33, citing GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth and its repurchase program.

The current short interest as a percentage of the float for GameStop is extremely high at 36.5%. That means that out of the 118.34 million shares in the tradable float, 43.24 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by about 2.24 million shares. If the bears are caught being too aggressive into a strong quarter, then shares of GME could easily rip higher post-earnings.

From a technical perspective, GME is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending relatively strong for the last month, with shares moving higher from its low of $23.36 to its intraday high of $26.35 a share. During that uptrend, shares of GME have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GME within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on GME, 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 $26.71 to $28.04 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.12 million shares. If that breakout triggers, then GME will set up to enter new 52-week-high territory above $28.35, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share.

I would avoid GME 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 $25 to its 50-day moving average at $24.60 a share with high volume. If we get that move, then GME will set up to re-test or possibly take out its next major support levels at $23.36 to $22.32 a share.

Finish Line

One potential earnings short-squeeze candidate is Finish Line (FINL), a mall-based specialty retailer of athletic shoes, apparel and accessories, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Finish Line to report revenue of $452.34 million on earnings of 75 cents per share.

Just recently, shares of Finish Line were downgraded to underperform by Sterne Agee. The firm said that Finish Line is losing shares to Foot Locker and that the company’s decision to open stores-within-stores at Macy’s department stores will likely harm Finish Line’s brand identity. Sterne Agee sees earnings coming in lower than expected both this year and next.

The current short interest as a percentage of the float for Finish Line is pretty high at 11.7%. That means that out of the 48.08 million shares in the tradable float, 5.74 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 20.1%, or by about 961,000 shares. If their bears are pressing their bets too aggressively into bullish quarter, then we could easily see shares of FINL spike sharply higher post-earnings.

From a technical perspective, FINL 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 $19.30 on the upside and $17.56 on the downside. A high-volume move above the upper-end of that recent range will possibly trigger a near-term breakout trade for shares of FINL post-earnings.

If you’re bullish on FINL, 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 $19.30 a share and then above its 200-day moving average of $20.07 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 962,118 shares. If that breakout triggers, then FINL will set up to re-test or possibly take out its next major overhead resistance levels at $21.34 to $23 a share.

I would avoid FINL 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 $17.76 to $17.56 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its 52-week low of $16.87 a share, which is bearish technical price action.

Texas Industries

Another earnings short-squeeze prospect is heavy construction materials supplier Texas Industries (TXI), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Texas Industries to report revenue of $140.98 million on a loss of 41 cents per share.

The current short interest as a percentage of the float for Texas Industries is very high at 15%. That means that out of the 12.63 million shares in the tradable float, 3.13 million shares are sold short by the bears. This stock has a high short interest and a very low tradable float. Any bullish earnings news could easily spark a solid short-covering rally for shares of TXI post-earnings.

From a technical perspective, TXI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last six months, with shares soaring higher from its low of $39.52 to its 52-week high of $67.44 a share. During that move uptrend, shares of TXI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TXI within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on TXI, then I would wait until after its report and look for long-biased trades if this stock manages to print a new 52-week high above $67.44 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 341,270 shares. If we get that move, then TXI will have a great chance of trending well north of $70 a share.

I would avoid TXI 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 levels at $62.50 a share to its 50-day moving average at $60.32 a share with high volume. If we get that move, then TXI will set up to re-test or possibly take out its next major support levels at $57.50 to $55.80 a share.

Fred’s

My final earnings short-squeeze play is retail discount store and full-service pharmacy operator Fred’s (FRED), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Fred’s to report revenue of $533.94 million on earnings of 20 cents per share.

The current short interest as a percentage of the float for Fred’s is pretty high at 10.6%. That means that out of the 33.10 million shares in the tradable float, 3.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.9%, or by about 199,000 shares. If the short-sellers are caught leaning too hard into a solid quarter, then we could easily see shares of FRED rip higher post-earnings.

From a technical perspective, FRED 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 two months and change, with shares soaring higher from its low of $12.25 to its recent high of $14.53 a share. During that uptrend, shares of FRED have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FRED within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on FRED, 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 $14.53 to $15.54 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 210,920 shares. If that breakout triggers, then FRED will set up to enter new 52-week-high territory above $15.98, which is bullish technical price action. Some possible upside targets off that breakout are $17 to $20 a share.

I would avoid FRED 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 $13.65 and its 50-day at $13.38 a share with high volume. If we get that move, then FRED will set up to re-test or possibly take out its next major support levels at $12.80 to $12.25 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.