Stock Quotes in this Article: ADUS, DMND, TEAR, DXM, GOGO

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.

Diamond Foods

My first earnings short-squeeze play is packaged food player Diamond Foods (DMND), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $216.75 million on earnings of 8 cents per share.

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The current short interest as a percentage of the float for Diamond Foods is extremely high at 34.3%. That means that out of the 18.09 million shares in the tradable float, 5.91 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.1%, or by about 286,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of DMND could easily explode sharply higher as the bears rush to cover some of their bets.

From a technical perspective, DMND 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 month, with shares moving higher from its low of $23.17 to its recent high of $31.09 a share. During that move, shares of DMND have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DMND within range of triggering a big breakout trade post-earnings.

If you're bullish on DMND, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $31.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 376,303 shares. If that breakout kicks off, then DMND will set up to re-fill some of its previous gap-down-day zone from early 2012 that started near $40 a share.

I would simply avoid DMND 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 $29 to $28.54 a share with high volume. If we get that move, the DMND will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $26.62 to its 200-day moving average of $23.10 a share.

Addus HomeCare

Another potential earnings short-squeeze play is home and community based services provider Addus HomeCare (ADUS), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Addus HomeCare to report revenue $68.07 million on earnings of 26 cents per share.

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The current short interest as a percentage of the float for Addus HomeCare is pretty high at 8.6%. That means that out of the 5.7 million shares in the tradable float, 490,000 shares are sold short by the bears. This is a decent short interest on a stock with a very small tradable float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of ADUS post-earnings.

From a technical perspective, ADUS 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 month and change, with shares moving higher from its low of $21.50 to its recent high of $29.40 a share. During that uptrend, shares of ADUS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ADUS within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on ADUS, then I would wait until after its report and look for long-biased trades if this stock manages to breakout above some near-term overhead resistance levels at $29.40 to $29.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 148,212 shares. If that breakout hits, then ADUS will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $32.40 a share. Any high-volume move above that level will then give ADUS a chance to tag $40 a share.

I would simply avoid ADUS 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 $27 to $26.05 a share with high volume. If we get that move, then ADUS will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $25.32 a share to its 200-day moving average of $24.06 a share. Any high-volume move below those levels will then give ADUS a chance to tag its next major support level at $21 a share.

Dex Media

Another potential earnings short-squeeze candidate is social, local and mobile marketing solutions provider Dex Media (DXM), which is set to release numbers on Thursday before the market open. There are currently no analysts' estimates available for shares of Dex Media.

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The current short interest as a percentage of the float for Dex Media is extremely high at 29.7%. That means that out of the 6.97 million shares in the tradable float, 5.07 million shares are sold short by the bears. This is a huge short interest on a stock with an extremely low tradable float. If the bulls get the earnings news they're looking for, then shares of Dex Media could explode to the upside as the bears jump to cover some of their trades.

From a technical perspective, DXM is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last few weeks, with shares moving between $6 on the downside and $7.92 on the upside. If shares of DXM can manage to break out above the upper-end of its recent range post-earnings, then this stock could soar sharply higher.

If you're bullish on DXM, 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 $7.50 to $7.92 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 198,895 shares. If that breakout hits, then DXM will set up to re-test or possibly take out its next major overhead resistance levels at $9.31 to its 200-day moving average of $9.79 a share, or possibly even $12 a share.

I would avoid DXM 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 its 50-day moving average of $6.56 a share to $6 a share with high volume. If we get that move, then DXM will set up to re-test or possibly take out its next major support levels at $5.66 to $5.27 a share, or even $4.50 a share.

TearLab

Another earnings short-squeeze prospect is in-vitro diagnostic player TearLab (TEAR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect TearLab to report revenue of $4.49 million on a loss of 13 cents per share.

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The current short interest as a percentage of the float for TearLab is extremely high at 21%. That means that out of the 29.42 million shares in the tradable float, 6.18 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set up shares of TEAR to experience a monster short-squeeze post-earnings.

From a technical perspective, TEAR is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $6 to its recent high of $8.28 a share. During that uptrend, shares of TEAR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TEAR within range of triggering a major breakout trade post-earnings.

If you're bullish 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 $8.10 to $8.28 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 472,405 shares. If that breakout hits, then TEAR will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $10.39 a share to $11.64 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 some key near-term support at $7.53 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 $6.80 to $6 a share.

Gogo

My final earnings short-squeeze play is in-flight connectivity and wireless in-cabin digital entertainment solutions provider Gogo (GOGO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Gogo to report revenue of $85.45 million on a loss of 27 cents per share.

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The current short interest as a percentage of the float for Gogo is extremely high at 21.2%. That means that out of the 30.03 million shares in the tradable float, 7.30 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.9%, or by about 533,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of GOGO could easily soar sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, GOGO is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending for the last month and change, with shares moving higher from its low of $18.18 to its recent high of $25.08 a share. During that uptrend, shares of GOGO have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GOGO within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on GOGO, 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 $25.08 to $27.40 share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.48 million shares. If that breakout hits, then GOGO will set up to re-test or possibly take out its next major overhead resistance levels at $32.48 to its all-time high at $35.77 a share.

I would avoid GOGO 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 $ 22.24 a share with high volume. If we get that move, then GOGO will set up to re-test or possibly take out its next major support levels at $19.31 to $18.18 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.