Stock Quotes in this Article: NUAN, RAX, BNNY, MKTO, FEYE

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.

Nuance Communications

My first earnings short-squeeze play is voice and language software solutions provider Nuance Communications (NUAN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Nuance Communications to report revenue of $485.15 million on earnings of 21 cents per share.

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The current short interest as a percentage of the float for Nuance Communications is pretty high at 9.7%. That means that out of the 247.61 million shares in the tradable float, 29.75 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of NUAN could easily rip sharply higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, NUAN is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last month and change, with shares moving between $14.73 on the downside and $16.24 on the upside. Shares of NUAN have just started to bounce higher right off its 50-day moving average of $14.83 a share. That bounce is quickly pushing the stock within range of triggering a big breakout trade post-earnings above the upper end of its sideways trading chart pattern.

If you're bullish on NUAN, 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 $16.24 to $16.47 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6.91 million shares. If that breakout hits, then NUAN will set up to re-test or possibly take out its next major overhead resistance levels at $18 to $20 a share. Any high-volume move above $20 will then give NUAN a chance to re-fill some of its previous gap-down-day zone from last April that started at $23.38 a share.

I would simply avoid NUAN 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 $14.89 a share to more key near-term support levels at $14.80 to $14.73 a share with high volume. If we get that move, the NUAN will set up to re-test or possibly take out its next major support levels $13.50 to its 52-week low at $13 a share.

FireEye

Another potential earnings short-squeeze trade idea is security platform software provider FireEye (FEYE), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect FireEye to report revenue $56.04 million on a loss of 37 cents per share.

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The current short interest as a percentage of the float for FireEye is pretty high at 9.4%. That means that out of the 57.09 million shares in the tradable float, 2.83 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12%, or by about 302,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of FEYE could easily spike sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, FEYE is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $36.15 to its recent high of $76.94 a share. During that move, shares of FEYE have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FEYE within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on FEYE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high at $76.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.08 million shares. If that breakout hits, then FEYE will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $90 to $100 a share.

I would simply avoid FEYE 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 $67.67 to $67.63 a share with high volume. If we get that move, then FEYE will set up to re-test or possibly take out its next major support levels at $60 to $55.14 a share, or even its 50-day moving average of $53.10 a share.

Annie's

Another potential earnings short-squeeze candidate is natural and organic food player Annie's (BNNY), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Annie's to report revenue of $45.90 million on earnings of 18 cents per share.

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The current short interest as a percentage of the float for Annie's is extremely high at 22.5%. That means that out of the 16.90 million shares in the tradable float, 3.65 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.1%, or by about 143,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BNNY could easily soar higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, BNNY 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 three months and change, with shares falling from its high of $52.38 to its recent low of $38.80 a share. During that downtrend, shares of BNNY have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of BNNY have now started to bounce off that $38.80 low and it's starting to move within range of triggering a big breakout trade above a key downtrend line.

If you're bullish on BNNY, 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 $42.34 to $44.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 317,050 shares. If that breakout hits, then BNNY will set up to re-test or possibly take out its next major overhead resistance levels at $47 to $50 a share, or even its 52-week high at $52.38 a share.

I would avoid BNNY 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 $40 to $38.80 a share with high volume. If we get that move, then BNNY will set up to re-test or possibly take out its next major support levels at $36.26 to $32.06 a share.

Rackspace Hosting

Another earnings short-squeeze prospect is open cloud player Rackspace Hosting (RAX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Rackspace Hosting to report revenue of $404.56 million on earnings of 14 cents per share.

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The current short interest as a percentage of the float for Rackspace is extremely high at 16.1%. That means that out of the 114.61 million shares in the tradable float, 18.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.7%, or by about 662,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of RAX could easily experience a monster short-squeeze as the bears rush to cover some of their positions.

From a technical perspective, RAX 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 and consolidating for the last two months, with shares moving between $32.62 on the downside and $40.50 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern could trigger a big breakout trade for shares of RAX post-earnings.

If you're bullish on RAX, 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 $39.82 to $40.50 a share and then once it clears its 200-day moving average of $42.70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3 million shares. If that breakout hits, then RAX will set up to re-test or possibly take out its next major overhead resistance levels at $46 to $50 a share. Any high-volume move above those levels will then give RAX a chance to tag its next major overhead resistance levels at $52 to $54 a share.

I would simply avoid RAX 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 $36.77 a share with high volume. If we get that move, then RAX will set up to re-test or possibly take out its next major support levels at $34.59 to its 52-week low at $32.62 a share. Any high-volume move below $32.62 will then push RAX into new 52-week-low territory, which is bearish technical price action.

Marketo

My final earnings short-squeeze play is cloud-based marketing software platform provider Marketo (MKTO), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Marketo to report revenue of $26.65 million on a loss of 25 cents per share.

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The current short interest as a percentage of the float for Marketo is pretty high at 8.2%. That means that out of the 21.06 million shares in the tradable float, 1.32 million shares are sold short by the bears. This is a very low tradable float on a stock with a decent short interest. Any bullish earnings news post-earnings could easily set off a sizeable short-squeeze for shares of MKTO.

From a technical perspective, MKTO 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 $28.31 to its recent high of $45 a share. During that uptrend, shares of MKTO have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MKTO within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on MKTO, 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 $43.15 a share to its all-time high at $45 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 406,510 shares. If that breakout hits, then MKTO will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60, or even $65 a share.

I would avoid MKTO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $41 to $40 a share with high volume. If we get that move, then MKTO will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $37.74 to $35 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.