Stock Quotes in this Article: COCO, JASO, KKD, LRN, WSM

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.

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.

JA Solar

My first earnings short-squeeze play is solar power player JA Solar (JASO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect JA Solar to report revenue of $250.42 million on a loss of 54 cents per share.

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The current short interest as a percentage of the float JA Solar is pretty high at 15%. That means that out of the 30.82 million shares in the tradable float, 4.06 million shares are sold short by the bears. This is a big short interest on a stock with relatively low tradable float. Any bullish earnings news could easily spark a large short-covering really for shares of JASO post-earnings.

From a technical perspective, JASO is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been downtrending over the last month and change, with shares falling from its high of $9.91 to its low of $7.28 a share. During that move, shares of JASO have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of JASO have started to bounce higher over the last week, and the stock is now moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on JASO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average at $8.03 a share and then once it takes out more resistance at $8.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.96 million shares. If that breakout triggers, then JASO will set up to re-test or possibly take out its next major overhead resistance levels at $9.60 to $9.91 a share. Any high-volume move above those levels will then put its 52-week high at $11.40 into range for shares of JASO.

I would simply avoid JASO 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 $7.28 to $6.83 a share with high volume. If we get that move, then JASO will set up to re-test or possibly take out its next major support levels $5.90 to $5.34 a share.

Corinthian Colleges

Another potential earnings short-squeeze trade idea is post-secondary education player Corinthian Colleges (COCO), which is set to release its numbers Thursday before the market open. Wall Street analysts, on average, expect Corinthian Colleges to report revenue of $379.66 million on earnings of 3 cents per share.

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The current short interest as a percentage of the float for Corinthian Colleges is extremely high at 26.1%. That means that out of the 78.97 million shares in the tradable float, 19.98 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2%, or by 392,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of COCO could rip sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, COCO is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways inside of a consolidation pattern for the last three months and change, with shares moving between $2.06 on the downside and $2.97 on the upside. Any high-volume move above the upper end of its recent range could trigger a major breakout trade for shares of COCO post-earnings.

If you're in the bull camp on COCO, 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 $2.75 to $2.90 a share and then once it clears its 52-week high at $2.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 777,330 shares. If that breakout triggers, then COCO will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are its next major overhead resistance levels at $3.44 to $4 a share.

I would simply avoid COCO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $2.37 a share and its 200-day at $2.31 a share with high volume. If we get that move, then COCO will set up to re-test or possibly take out its next major support levels at $2.15 to $2.06 a share. Any high-volume move below those levels will then put $1.90 to $1.87 into range for shares of COCO.

Williams-Sonoma

Another earnings short-squeeze candidate is multi-channel specialty retailer of products for the home Williams-Sonoma (WSM), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Williams-Sonoma to report revenue of $939.80 million on earnings of 47 cents per share.

Just this morning, UBS increased its price target on shares of Williams-Sonoma to $61 as consumer spending continues to improve. In the report, UBS also increased its EPS estimates for WSM.

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The current short interest as a percentage of the float for Williams-Sonoma is pretty high at 8.1%. That means that out of the 90.53 million shares in the tradable float, 7.62 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of WSM could rip sharply higher post-earnings and squeeze out some of the short-sellers.

From a technical perspective, WSM 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 six months, with shares soaring higher from its low of $43.82 to its recent high of $61.38 a share. During that uptrend, shares of WSM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WSM within range of triggering a big breakout trade post-earnings.

If you're bullish on WSM, 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 $60.67 to its 52-week high at $61.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 871,462 shares. If that breakout triggers, then WSM will set up enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $75 a share.

I would avoid WSM 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 $58.03 a share and then below more support at to $56.96 a share with high volume. If we get that move, then WSM will set up to re-test or possibly take out its next major support levels at $52.40 to $51.71 a share.

K12

Another earnings short-squeeze prospect is technology-based education player K12 (LRN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect K12 to report revenue of $200.96 million on earnings of 3 cents per share.

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The current short interest as a percentage of the float for K12 is extremely high at 18.8%. That means that out of the 26.62 million shares in the tradable float, 5.38 million shares are sold short by the bears. This is a big short interest on a stock with a very low tradable float. Any bullish earnings news could easily send shares of LRN skyrocketing higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, LRN 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 six months, with shares pushing higher from its low of $19.92 to its recent high of $32.40 a share. During that uptrend, shares of LRN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LRN within range of triggering a big breakout trade post-earnings.

If you're bullish on LRN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $32.40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 198,859 shares. If that breakout triggers, then LRN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are its next major overhead resistance levels at $37 to $39.74 a share.

I would simply avoid LRN 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 $29.91 a share and then below its 50-day moving average of $29.80 a share with high volume. If we get that move, then LRN will set up to re-test or possibly take out its next major support levels at $26 to $25.84 a share. Any high-volume move below those levels will then put its 200-day at $24.36 into range for shares of LRN.

Krispy Kreme Doughnuts

My final earnings short-squeeze play is retailer and wholesaler of doughnuts, complementary beverages and packaged sweets Krispy Kreme Doughnuts (KKD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Krispy Kreme Doughnuts to report revenue of $111.36 million on earnings of 15 cents per share.

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The current short interest as a percentage of the float for Krispy Kreme Doughnuts is notable at 3.8%. That means that out of the 64.23 million shares in the tradable float, 2.37 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.3%, or by 77,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of KKD could trend sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, KKD 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 three months, with shares moving higher from its low of $12.59 to its recent high of $23.57 a share. During that uptrend, shares of KKD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KKD within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on KKD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $23.57 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.42 million shares. If that breakout triggers, then KKD will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $32 a share.

I would avoid KKD 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 $20.60 a share to its 50-day moving average at $20.07 a share with high volume. If we get that move, then KKD will set up to re-test or possibly take out its next major support levels at $18 to $16 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.