Stock Quotes in this Article: AIR, BRLI, CTAS, DRI, RAD

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.

Bio-Reference Laboratories

My first earnings short-squeeze play is laboratory testing services player Bio-Reference Laboratories (BRLI), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Bio-Reference Laboratories to report revenue of $191.45 million on earnings of 43 cents per share.

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This company recently slashed its profit guidance for the quarter and the year, citing the government shutdown and the transitions under the Affordable Care Act disrupted business, as did changes in reimbursements from both public and private insurers.

The current short interest as a percentage of the float Bio-Reference Laboratories is extremely high at 36.3%. That means that out of the 24.44 million shares in the tradable float, 9.59 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of BRLI post-earnings.

From a technical perspective, BRLI is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly over the last month, with shares moving lower from its high of $37.97 to its recent low of $26.12 a share. During that downtrend, shares of BRLI have been consistently making lower highs and lower lows, which is bearish technical price action. That move has now pushed shares of BRLI into oversold territory, since its current relative strength index reading is 28.48.

If you're bullish on BRLI, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 200-day moving average of $28.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 311,738 shares. If we get that move, then BRLI will set up to re-test or possibly take out its 50-day moving average at $31.91 a share. Any high-volume move above $31.91 will then give BRLI a chance to re-test its recent gap down day high of $35 a share.

I would simply avoid BRLI 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 $26.12 to $25.38 a share with high volume. If we get that move, then BRLI will set up to re-test or possibly take out its next major support level at its 52-week low of $23.36 a share. Any high-volume move below $23.36 will then give BRLI a chance to trend back below $20 a share.

AAR

Another potential earnings short-squeeze trade idea is aviation services and products player AAR (AIR), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect AAR to report revenue $536.14 million on earnings of 48 cents per share.

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The current short interest as a percentage of the float for AAR is notable at 6.5%. That means that out of the 36.40 million shares in the tradable float, 2.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 31.3%, or by about 576,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of AIR could easily rip sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, AIR 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 moving higher from its low of $20.76 to its recent high of $31.55 a share. During that uptrend, shares of AIR have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AIR within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on AIR, 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 $31 to its 52-week high at $31.55 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 295,734 shares. If that breakout hits, then AIR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $45 a share.

I would simply avoid AIR 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 $29.43 a share to more near-term support at $29.02 a share with high volume. If we get that move, then AIR will set up to re-test or possibly take out its next major support levels at $27 to $26 a share. Any high-volume move below those levels will then set up AIR to re-test or possibly take out its 200-day moving average of $23.83 a share.

Darden Restaurants

One potential earnings short-squeeze candidate is full service restaurant player Darden Restaurants (DRI) which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $2.07 billion on earnings of 21 cents per share.

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Just today, Activist hedge fund Barington Capital Group issued a report arguing that Darden Restaurants could be worth $71 to $80 a share if the company enacts a series of strategic changes. Those changes would be Darden splitting into two companies – one for Olive Garden and Red Lobster, and the other for its higher-growth brands, including LongHorn Steakhouse, Capital Grille, Yard House and Bahama Breeze. The firm also recommends Darden explore creating a publicly traded real estate investment trust.

The current short interest as a percentage of the float for Darden Restaurants stands at 6%. That means that out of the 129.46 million shares in the tradable float, 8.3 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of DRI could easily explode sharply higher post-earnings as the bears jump to cover some of their short bets.

From a technical perspective, DRI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last two months, with shares moving between $50.69 on the downside and $54.08 on the upside. Shares of DRI have now started to bounce higher off its 50-day moving average of $52 and it's quickly moving within range of triggering a big breakout trade above the upper-end of its recent range.

If you're bullish on DRI, 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 $54.08 to its 52-week high at $55.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.90 million shares. If that breakout hits, then DRI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would avoid DRI 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 $50.69 to its 200-day moving average of $49.69 a share with high volume. If we get that move, then DRI will set up to re-test or possibly take out its next major support levels $46 to $44 a share.

Rite Aid

Another earnings short-squeeze prospect is retail drugstore chain player Rite Aid (RAD), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.32 billion on earnings of 4 cents per share.

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Just recently, JPMorgan analyst Lisa Gill said the near-term could be somewhat more bumpy for Rite Aid than in recent quarters, citing the economy, reimbursement pressure and ongoing work in executing its turnaround plan.

The current short interest as a percentage of the float for Rite Aid sits at 4.4%. That means that out of the 902.05 million shares in the tradable float, 39.13 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of RAD could trend sharply higher post-earning as a sharp short-covering rally takes over.

From a technical perspective, RAD 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 moving higher from its low of $2.62 to its recent high of $6.15 a share. During that uptrend, shares of RAD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RAD within range of triggering a big breakout trade post-earnings.

If you're bullish on RAD, 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 $6 to its 52-week high at $6.15 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 31.18 million shares. If that breakout hits, then RAD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $7 to $8 a share, or even $9 a share.

I would simply avoid RAD or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day moving average of $5.36 a share with high volume. If we get that move, then RAD will set up to re-test or possibly take out its next major support levels at $5 to $4.50 a share, or even $4 a share.

Cintas

My final earnings short-squeeze play is corporate identity uniforms and related business services provider Cintas (CTAS), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Cintas to report revenue of $1.12 billion on earnings of 68 cents per share.

The current short interest as a percentage of the float for Cintas is pretty high at 6.9%. That means that out of the 99.88 million shares in the tradable float, 6.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.7%, or by 46,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CTAS could soar sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, CTAS 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 month, with shares moving higher from its low of $44.01 to its recent high of $57.99 a share. During that uptrend, shares of CTAS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CTAS within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on CTAS, 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 $55.97 to its 52-week high at $57.99 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 550,661 shares. If that breakout hits, then CTAS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.

I would avoid CTAS 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 $53.50 a share to more near-term support at $52.27 a share with high volume. If we get that move, then CTAS will set up to re-test or possibly take out its next major support levels at $49 to its 200-day moving average of $47.86 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.