Stock Quotes in this Article: CVLT, PRXL, RYL, VPRT, INVN

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 Ready to Break Out

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 Rocket Stocks for a Volatile Week

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.

InvenSense

My first earnings short-squeeze play is technology stock InvenSense (INVN), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect InvenSense to report revenue of $67.13 million on earnings of 12 cents per share.

The current short interest as a percentage of the float for InvenSense is extremely high at 40.3%. That means that out of the 81.71 million shares in the tradable float, 26.18 million shares are sold short by the bears.

>>4 Tech Stocks Rising on Unusual Volume

Just recently, Needham downgraded shares of InvenSense to hold from buy due to valuation.

From a technical perspective, INVN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is spiking higher here right above its 50-day moving average of $18.34 a share. This move is starting to push shares of INVN within range of triggering a major breakout trade post-earnings.

If you're bullish on INVN, 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 $21.80 to $21.82 and then once it clears its all-time high at $22.35 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.47 million shares. If that breakout hits, then INVN will set up to enter new all-time-high territory above $22.35, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.

I would simply avoid INVN 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 at $18.34 a share with high volume. If we get that move, then INVN will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $16.23 to $15.20 a share. Any high-volume move below those levels will then put $14 to $13 a share into range for INVN.

Parexel International

Another potential earnings short-squeeze trade idea is biopharmaceutical services player Parexel International (PRXL), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Parexel International to report revenue $480.22 million on earnings of 49 cents per share.

>>4 M&A Deal Stocks to Watch in 2014

Just recently, ISI Group upgraded shares of Parexel International to strong-buy from a buy rating.

The current short interest as a percentage of the float for Parexel International is notable at 3.7%. That means that out of the 55.02 million shares in the tradable float, 1.91 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.5%, or by about 124,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of PRXL could easily rip sharply higher as the bears rush to cover some of their positions.

From a technical perspective, PRXL 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 moving higher from its low of $38.65 to its recent high of $48.99 a share. During that move, shares of PRXL have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PRXL within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on PRXL, 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 $48.86 to $48.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 754,936 shares. If that breakout hits, then PRXL will set up to re-fill some of its previous gap-down-day zone from last October that started at $55.02 a share. Any high-volume move above $55.02 would then give PRXL a chance to tag $60 a share.

I would simply avoid PRXL 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 $46.60 a share and its 50-day moving average of $43.80 a share with high volume. If we get that move, then PRXL will set up to re-test or possibly take out its next major support levels at $41 to $40 a share, or even $39 a share.

Ryland Group

Another potential earnings short-squeeze candidate is homebuilder and mortgage-finance player Ryland Group (RYL) which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Ryland Group to report revenue of $668.97 million on earnings of $1.13 per share.

>>4 Big Stocks on Traders' Radars

The current short interest as a percentage of the float for Ryland Group is very high at 13.1%. That means that out of the 45.17 million shares in the tradable float, 5.95 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of RYL could easily rip sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, RYL 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 month, with shares moving between $40 on the downside and $43.74 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could easily trigger a major breakout trade for shares of RYL.

If you're bullish on RYL, 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 $43.74 to $44.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.16 million shares. If that breakout hits, then RYL will set up to re-test or possibly take out its 52-week high at $50.42 a share. Any high-volume move above that level will then give RYL a chance to tag $55 a share.

I would avoid RYL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day moving average at $40.62 a share and its 50-day moving average of $40.53 a share with high volume. If we get that move, then RYL will set up to re-test or possibly take out its next major support levels at $37 to $35 a share, or even $33 a share.

CommVault Systems

Another earnings short-squeeze prospect is data and information management software applications provider CommVault Systems (CVLT), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect CommVault Systems to report revenue of $149.10 million on earnings of 44 cents per share.

>>5 Big Trades to Survive the S&P's Cold Spell

Just recently, Pacific Crest analyst Brent Bracelin said some stocks in the IT storage and networking sector could rebound in 2014. Bracelin reported that 54% of the resellers were above their sales targets in the fourth quarter of 2013. Storage was stronger than networking, as 80% of the storage resellers were above their targets last quarter. Among mid-cap names, Bracelin was upbeat on shares of CommVault.

The current short interest as a percentage of the float for CommVault Systems is pretty high at 9.4%. That means that out of the 44.15 million shares in the tradable float, 3.51 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.1%, or by about 600,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of CVLT could easily experience a large short-squeeze post-earnings as the bears rush to cover some of their bets.

From a technical perspective, CVLT is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $66.95 on the downside and $79.13 on the upside. Any high-volume move post-earnings above the upper-end of its recent range could trigger a major breakout trade for shares of CVLT.

If you're bullish on CVLT, 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 $77.51 to $79.13 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 693,453 million shares. If that breakout hits, then CVLT will set up to re-test or possibly take out its next major overhead resistance levels at $84 to $86 a share, or even its 52-week high at $90 a share. Any high-volume move above $90 will then give CVLT a chance to tag $100 a share.

I would simply avoid CVLT or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $71 a share with high volume. If we get that move, then CVLT will set up to re-test or possibly take out its next major support levels $68.25 to $66.95 a share. Any high-volume move below those levels will then give CVLT a chance to take out its 52-week low at $66 a share.

Vistaprint

My final earnings short-squeeze play is online provider of coordinated portfolios of marketing products and services player Vistaprint (VPRT), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Vistaprint N.V. to report revenue of $375.02 million on earnings of $1.23 per share.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Vistaprint is extremely high at 19.3%. That means that out of the 21.77 million shares in the tradable float, 5.92 million shares are sold short by the bears. This is a high short interest on a stock with a low tradable float. If the bulls get the earnings news they're looking for, then shares of VPRT could spike significantly higher post-earnings as bears jump to cover some of their bets.

From a technical perspective, VPRT is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last two months, with shares falling from its high of $58.20 to its recent low of $48.89 a share. During that downtrend, shares of VPRT have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of VPRT have now moved into oversold territory, since its current relative strength index reading is 34.15. Oversold can always get more oversold, but it's also an area where a stock can experience a sharp bounce higher from.

If you're in the bull camp on VPRT, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $51.62 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 217,665 shares. If that breakout hits, then VPRT will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $54.91 to $55.85 a share. Any high-volume move above those levels will then give VPRT a chance to re-test or possibly take out its 52-week high at $58.20 a share.

I would avoid VPRT 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 $48.94 to $48.89 a share with high volume. If we get that move, then VPRT will set up to re-test or possibly take out its next major support levels at $45 to $40 a share, or even $38 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.