Stock Quotes in this Article: HDS, HOV, PLAB, SWH, JOY

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.

Photronics

My first earnings short-squeeze trade idea is photomasks maker Photronics (PLAB), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Photronics to report revenue of $106.05 million on earnings of 8 cents per share.

About a month ago, Needham downgraded shares of Photronics to hold from buy following the company's negative preannouncement. Needham anticipates that Photronics will face some near-term challenges and may not generate EPS over 80 cents per share until fiscal year 2015.

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The current short interest as a percentage of the float Photronics is pretty high at 11.9%. That means that out of the 59.69 million shares in the tradable float, 7.38 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a large short-squeeze for shares of PLAB post-earnings.

From a technical perspective, PLAB is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months and change, with shares moving higher from its low of $7.03 to its recent high of $8.89 a share. During that uptrend, shares of PLAB have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PLAB within range of triggering a near-term breakout trade post-earnings.

If you're bullish on PLAB, 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 $8.74 to its 52-week high at $8.89 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 212,683 shares. If that breakout hits, then PLAB will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $13 to $14 a share.

I would simply avoid PLAB 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 $7.87 to $7.58 a share with high volume. If we get that move, then PLAB will set up to re-test or possibly take out its next major support levels at $7.03 to $6 a share.

Smith & Wesson

Another potential earnings short-squeeze play is firearms manufacturer Smith & Wesson (SWHC), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Smith & Wesson to report revenue $137.52 million on earnings of 21 cents per share.

Just recently, Lake Street Capital Markets upgraded shares of Smith & Wesson to buy from hold and slapped a $17 per share price target on the stock.

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The current short interest as a percentage of the float for Smith & Wesson is extremely high at 30.6%. That means that out of the 61.60 million shares in the tradable float, 18.70 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SWHC could easily explode higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, SWHC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last three months, with shares moving higher from its low of $10.25 to its intraday high of $12.48 a share. During that uptrend, shares of SWHC have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SWHC within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on SWHC, 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 $13 to its 52-week high at $13.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.59 million shares. If that breakout hits, then SWHC will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $16 to $18 a share.

I would simply avoid SWHC 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 $11.22 a share with high volume. If we get that move, then SWHC will set up to re-test or possibly take out its next major support levels at $10.50 to its 200-day moving average of $10.34 a share. Any high-volume move below those levels will then give SWHC a chance to tag $10 to $9.50 a share.

Hovnanian Enterprises

Another earnings short-squeeze candidate is homebuilding and financial services player Hovnanian Enterprises (HOV), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Hovnanian Enterprises to report revenue of $582.89 million on earnings of 16 cents per share.

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The current short interest as a percentage of the float for Hovnanian Enterprises is extremely high at 20.9%. That means that out of the 123.10 million shares in the tradable float, 22.76 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 504,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of HOV could rip sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, HOV is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been downtrending over the last five months, with shares moving lower from its high of $5.92 to its recent low of $4.77 a share. During that move, shares of HOV have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of HOV have now started to rebound off that $4.77 low and it's quickly moving within range of triggering a near-term breakout trade.

If you're bullish on HOV, 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 $5.19 to $5.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.18 million shares. If that breakout hits, then HOV will set up to re-test or possibly take out its next major overhead resistance levels at $5.92 to $6.47 a share, or even $7 a share.

I would avoid HOV 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 $4.91 to $4.77 a share, and then below $4.65 a share with high volume. If we get that move, then HOV will set up to re-test or possibly take out its next major support levels $4 to $3.50 a share.

Joy Global

Another earnings short-squeeze prospect is mining equipment manufacturer Joy Global (JOY), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Joy Global to report revenue of $1.12 billion on earnings of $1.12 per share.

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The current short interest as a percentage of the float for Joy Global is very high at 18.4%. That means that out of the 105.36 million shares in the tradable float, 19.34 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of JOY could explode higher post-earning as a sharp short-covering rally takes hold.

From a technical perspective, JOY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending modestly over the last few weeks, with shares moving higher from its low of $54.32 to its recent high of $57.30 a share. During that move, shares of JOY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JOY within range of triggering a big breakout trade post-earnings.

If you're bullish on JOY, 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 $57.30 to $59.17 a share, and then once it takes out some past resistance at $61.15 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.59 million shares. If that breakout hits, then JOY will set up to re-test or possibly take out its next major overhead resistance levels at $65 to $68.33 a share.

I would simply avoid JOY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day at $54.77 and its 200-day at $54.05 a share high volume. If we get that move, then JOY will set up to re-test or possibly take out its next major support levels at $51 to $50 a share. Any high-volume move below those levels will then give JOY a chance to tag $48 to $47.50 a share.

HD Supply

My final earnings short-squeeze play is home improvement retailer HD Supply (HDS), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect HD Supply to report revenue of $2.29 billion on earnings of 36 cents per share.

The current short interest as a percentage of the float for HD Supply is very high at 12.2%. That means that out of the 61.19 million shares in the tradable float, 6.65 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13%, or by 866,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of HDS could soar sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, HDS is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending for the last month, with shares moving higher from its low of $19.55 to its intraday high of $21.73 a share. During that uptrend, shares of HDS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of HDS within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on HDS, 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 $22.71 to $22.84 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.48 million shares. If that breakout hits, then HDS will set up to re-test or possibly take out its next major overhead resistance levels at $23.78 to its all-time high of $25.06 a share. Any high-volume move above $25.06 will then give HDS a chance to tag $60 a share.

I would avoid HDS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $20.99 a share with high volume. If we get that move, then HDS will set up to re-test or possibly take out its next major support levels at $19.55 to $18.99 a share. Any high-volume move below those levels will then give HDS a chance to tag its all-time low of $17.80 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.