Stock Quotes in this Article: FDO, OZRK, PSMT, LEDS, EOPN

DELAFIELD, 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.

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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.

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.

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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.

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.

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With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

PriceSmart

My first earnings short-squeeze trade idea is international membership shopping warehouse clubs player PriceSmart (PSMT), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect PriceSmart to report revenue of $568.33 million on earnings of 64 cents per share.

During the last quarter, this company reported revenue of $607.4 million and GAAP reported sales were 11% higher than the prior-year quarter's $548.4 million. Also during the last quarter, this company reported EPS of 82 cents per share and GAAP EPS was 82 cents per share, which was 22% higher than the prior-year quarter's 67 cents per share.

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The current short interest as a percentage of the float for PriceSmart is very high at 11.6%. That means that out of the 23.23 million shares in the tradable float, 2.17 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.2%, or by about 47,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of PSMT could skyrocket higher post-earnings.

From a technical perspective, PSMT 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 four months, with shares soaring higher from its low of $70.02 to its recent high of $92.67 a share. During that move, shares of PSMT have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PSMT within range of triggering a near-term breakout trade.

If you're bullish on PSMT, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new 52-week high above $92.67 a share with high volume. If PSMT takes out $92.67 a share before it reports earnings, then readjust to the new breakout price. Look for volume on that move that hits near or above its three-month average action of 128,851 shares. If that breakout triggers, then PSMT will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $100 to $110 a share, or even $115 a share.

I would simply avoid PSMT or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $90 a share to its 50-day at $87.97 a share with high volume. If we get that move, then PSMT will set up to re-test or possibly take out its next major support level at $85.85 to $82.97 a share. Any high-volume move below those levels will then put its 200-day at $80.08 into range for shares of PSMT.

Bank of the Ozarks

Another potential earnings short-squeeze play is banking player Bank of the Ozarks (OZRK), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $63.04 million on earnings of 57 cents per share.

The current short interest as a percentage of the float for Bank of the Ozarks is pretty high at 12%. That means that out of the 30.96 million shares in the tradable float, 3.72 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8%, or by about 276,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of OZRK could experience a notable short-squeeze post-earnings.

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From a technical perspective, OZRK 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 three months, with shares moving higher from its low of $39.44 to its recent high of $46.85 a share. During that uptrend, shares of OZKR have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of OZRK within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on OZRK, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new 52-week high above $46.85 a share with high volume. If OZRK takes out $46.85 a share before it reports earnings, then readjust to the new breakout price. Look for volume on that move that registers near or above its three-month average action of 163,259 shares. If that breakout triggers, then OZRK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share, or even $60 a share.

I would simply avoid OZRK 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 $45 to its 50-day at $43.40 a share with high volume. If we get that move, then OZRK will set up to re-test or possibly take out its next significant support levels at $42.36 to around $40 a share.

Family Dollar Stores

One potential earnings short-squeeze candidate is discount store operator Family Dollar Stores (FDO), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Family Dollar Stores to report revenue of $2.57 billion on earnings of $1.03 per share.

This company has reported steady earnings results for the last eight quarters, and for the last four, net income has risen year-over-year by an average of 6%. For the most recent quarter, net income jumped 13% marking the biggest gain.

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The current short interest as a percentage of the float for Family Dollar Stores is notable at 5.8%. That means that out of the 87.43 million shares in the tradable float, 6.37 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 the bulls get the earnings news they're looking for.

From a technical perspective, FDO is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double bottom chart pattern at $59.06 to $59.38 a share. Following that bottom, shares of FDO have started to uptrend, with the stock moving higher from its low of $59.38 to its intraday high of $64.71 a share. During that uptrend, shares of FDO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FDO within range of triggering a near-term breakout trade.

If you're bullish on FDO, 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 $64.71 to $65.55 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.39 million shares. If we get that breakout, then FDO will set up to re-test or possibly take out its next major overhead resistance levels at $71.69 to $73.61 a share.

I would avoid FDO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $62.51 a share and its 200-day at $61.93 a share with high volume. If we get that move, then FDO will set up to re-test or possibly take out its next major support levels at $59.38 to $59.06 a share. Any high-volume move below those levels will then put $58 to $57 into range for shares of FDO.

E2open

Another earnings short-squeeze prospect is cloud-based, on-demand software solutions provider E2open (EOPN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect E2open to report revenue of $15.75 million on a loss of 20 cents per share.

The current short interest as a percentage of the float for E2open is very high at 15.4%. That means that out of the 10 million shares in the tradable float, 1.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.2%, or by about 149,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of EOPN could explode higher post-earnings as the shorts rush to cover some of those bets.

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From a technical perspective, EOPN 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, with shares soaring higher from its low of $12.27 to its recent high of $18.22 a share. During that uptrend, shares of EOPN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of EOPN within range of triggering a major breakout trade post-earnings.

If you're bullish on EOPN, 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 $18.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 185,838 shares. If that breakout triggers, then EOPN will set up to re-test or possibly take out its next major overhead resistance levels at $20.85 to its all-time high at $22 a share. Any high-volume move above those levels will then give EOPN a chance to tag $25 a share.

I would avoid EOPN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $16.57 a share and its 50-day at $15.44 a share with high volume. If we get that move, then EOPN will set up to re-test or possibly take out its next major support levels at $15 to $14 a share.

SemiLEDs

My final earnings short-squeeze trade idea is developer, manufacturer and seller of LED chips and LED components SemiLEDs (LEDS), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect SemiLEDS to report revenue of $5.17 million on a loss of 21 cents per share.

The current short interest as a percentage of the float for SemiLEDS is pretty high at 9.8%. That means that out of the 10.48 million shares in the tradable float, 1.02 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 26.9%, or by about 215,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of LEDS could spike sharply higher post-earnings.

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From a technical perspective, LEDS is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been uptrending for the last two months, with shares moving higher from its low of $1.28 to its recent high of $2.09 a share. During that uptrend, shares of LEDS have been mostly making higher lows and higher highs, which is bullish technical price action. That move now has LEDS trading within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on LEDS, 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 $1.84 to $2.09 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 914,076 shares. If we get that breakout, then LEDS will set up to re-test or possibly take out its next major overhead resistance levels at $2.44 to its 52-week high at $2.82 a share. Any high-volume move above those levels will then give LEDS a chance to trend north of $3 a share.

I would avoid LEDS after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $1.53 to $1.42 a share with high volume. If we get that action, then LEDS will set up to re-test or possibly take out its 200-day at $1.25 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 Delafield, Wis.

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

Roberto Pedone, based out of Delafield, 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.