Stock Quotes in this Article: CALL, RLD, TEAR, SRPT, XONE

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.

>>5 Stocks Poised for Breakouts

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.

>>5 Stocks Under $10 Set to Soar

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.

RealD

My first earnings short-squeeze play is three dimensional technologies licensor RealD (RLD), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect RealD to report revenue of $42.95 million on a loss of 19 cents per share.

>>5 Breakout Trades Under $10

The current short interest as a percentage of the float RealD is pretty high at 10.4%. That means that out of the 43.68 million shares in the tradable float, 4.38 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a big short-squeeze for shares of RLD post-earnings.

From a technical perspective, RLD 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 and change, with shares moving between $6.19 on the downside and $7.56 on the upside. Shares of RLD are now starting to trend within range of triggering a breakout trade above the upper-end of its recent range post-earnings.

If you're bullish on RLD, 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 $7.20 to $7.56 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 455,734 shares. If that breakout hits, then RLD will set up to re-test or possibly take out is next major overhead resistance levels at $8.26 to $9 a share. Any high-volume move above those levels will then give RLD a chance to tag $11 to $12 a share.

I would simply avoid RLD 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 $6.83 to its 52-week low at $6.19 a share with high volume. If we get that move, then RLD will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $5 to $4.50 a share.

TearLab

Another potential earnings short-squeeze trade idea is in-vitro diagnostic player TearLab (TEAR), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect TearLab to report revenue of $4.21 million on a loss of 14 cents per share.

>>5 Stocks With Big Insider Buying

The current short interest as a percentage of the float for TearLab is extremely high at 25.6%. That means that out of the 29.18 million shares in the tradable float, 6.95 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.6%, or by about 548,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of TEAR could rip sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, TEAR 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 downtrending for the last three months and change, with shares moving lower from its high of $15.18 to its recent low of $9.26 a share. During that move, shares of TEAR have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of TEAR have now started to spike higher and flirt with its 50-day moving average. That move is starting to push TEAR within range of triggering a breakout trade above a key downtrend line post-earnings.

If you're in the bull camp on TEAR, 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 Monday's high of $11.64 to $12.39 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 562,768 shares. If that breakout triggers, then TEAR will set up to re-test or possibly take out its next major overhead resistance levels at $13.80 to its 52-week high at $15.18 a share.

I would simply avoid TEAR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day moving average at $9.80 a share to more near-term support at $9.26 a share with high volume. If we get that move, then TEAR will set up to re-test or possibly take out its next major support levels at $8 to $7 a share, or even $6 a share.

Sarepta Therapeutics

One potential earnings short-squeeze candidate is biopharmaceuticals player Sarepta Therapeutics (SRPT), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Sarepta Therapeutics to report revenue of $4.57 million on a loss of 65 cents per share.

>>5 Stocks Ready to Break Out

The current short interest as a percentage of the float for Sarepta Therapeutics is extremely high at 33%. That means that out of the 29.07 million shares in the tradable float, 10.51 million shares are sold short by the bears. This is a huge short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a monster short-squeeze for shares of SRPT post-earnings.

From a technical perspective, SRPT is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last month, with shares plunging from its high of $55.61 to its recent low of $34.30 a share. During that downtrend, shares of SRPT have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of SRPT have now started to spike off that $34.30 low, and it's moving within range of triggering a breakout trade above a key downtrend line.

If you're bullish on SRPT, 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 $40 a share to its 50-day moving average of $42.03 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.95 million shares. If that breakout triggers, then SRPT will set up to re-test or possibly take out its next major overhead resistance levels at $44 to $48 a share, or even $50 a share.

I would avoid SRPT or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day moving average of $36.57 a share to more near-term support at $34.30 a share with high volume. If we get that move, then SRPT will set up to re-test or possibly take out its next major support levels at $29 to $25 a share.

MagicJack VocalTec

Another earnings short-squeeze prospect is voice-over-Internet-protocol service provider MagicJack VocalTec (CALL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect MagicJack VocalTec to report revenue of $37.53 million on earnings of 42 cents per share.

>>5 Rocket Stocks to Buy in November

The current short interest as a percentage of the float for MagicJack VocalTec is extremely high at 39.7%. That means that out of the 10.70 million shares in the tradable float, 4.09 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CALL could easily explode to the upside post-earnings as the bears rush to cover some of their bets.

From a technical perspective, CALL is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last three months and change, with shares moving lower from its high of $16.57 to its recent low of $11.13 a share. During that downtrend, shares of CALL have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of CALL have now started to spike higher off that $11.13 low, and it's moving within range of triggering a near-term breakout trade.

I would simply avoid CALL 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 $12 to $11.13 a share with high volume. If we get that move, then CALL will set up to re-test or possibly take out its next major support levels at its 52-week low of $10.90 a share.

ExOne

My final earnings short-squeeze idea is three-dimensional printing machines and printed products provider ExOne (XONE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect ExOne to report revenue of $11.81 million on earnings of 2 cents per share.

The current short interest as a percentage of the float for ExOne is extremely high at 42.5%. That means that out of the 8.06 million shares in the tradable float, 3.63 million shares are sold short by the bears. This is a huge short interest on a stock with a very low float. If the bulls get the earnings news they're looking for, then shares of XONE could skyrocket higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, XONE is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending strong for the last month, with shares moving higher from its low of $42.16 to its recent high of $60.99 a share. During that move, shares of XONE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of XONE within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on XONE, 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 $60.99 to $65 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 934,482 shares. If that breakout triggers, then XONE will set up to re-test or possibly take out its next major overhead resistance levels at $70 to $73 a share. Any high-volume move above those levels will then give XONE a chance to re-test or possibly take out its all-time high at $78 a share.

I would avoid XONE 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 $57.50 a share with high volume. If we get that move, then XONE will set up to re-test or possibly take out its next major support levels at $54.10 a share to its 50-day moving average of $53.33 a share. Any high-volume move below those levels will then give XONE a chance to tag $50 to $47.50 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 Delafield, Wis.


RELATED LINKS:







Follow Stockpickr on Twitter and become a fan on Facebook.

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.