Stock Quotes in this Article: ARO, ARUN, BBY, BONT, VNET

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.

Bon-Ton Stores

My first earnings short-squeeze play is department stores player Bon-Ton Stores (BONT), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Bon-Ton Stores to report revenue of $642.16 million on a loss of $1.23 per share.

Just this morning, Buckingham said Bon-Ton's first-quarter results could be a positive catalyst for the stock and recommended buying the stock ahead of the quarter.

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The current short interest as a percentage of the float for Bon-Ton Stores is extremely high at 47.5%. That means that out of the 10.68 million shares in the tradable float, 5.01 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.4%, or by about 18,808 shares. If the bears get caught pressing their bets into a strong quarter, then shares of BONT could easily jump sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, BONT is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating for the last two months and change, with shares moving between $9.55 on the downside and $12.04 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 BONT.

If you're bullish on BONT, 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 $11.01 to $11.70 a share and then once it clears more resistance at $11.90 to $12.04 a a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 501,402 shares. If that breakout hits, then BONT will set up to re-test or possibly take out its next major overhead resistance level near $14 a share. Any high-volume move above $14 will then give BONT a chance to re-fill some of its previous gap-down-day zone from January that started near $16 a share.

I would simply avoid BONT 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 $9.55 to its 52-week low of $9.12 a share with high volume. If we get that move, then BONT will set up to enter new 52-week-low territory, which is bearish technical price action.

21Vianet Group

Another potential earnings short-squeeze trade idea is carrier-neutral Internet data center services provider 21Vianet Group (VNET), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect 21Vianet Group to report revenue $93.53 million on earnings of 10 cents per share.

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The current short interest as a percentage of the float for 21Vianet Group is notable at 4.5%. That means that out of the 41.56 million shares in the tradable float, 1.94 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.1%, or by about 254,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of VNET could easily surge sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, VNET is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending a bit for the last few weeks, with shares moving higher from its low of $22.59 to its recent high of $27.37 a share. During that move, shares of VNET have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of VNET within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on VNET, 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 $27.37 to $28.15 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.02 million shares. If that breakout hits post-earnings, then VNET will set up to re-test or possibly take out its next major overhead resistance levels at $30.28 to its 52-week high at $32.19 a share. Any high-volume move above $32.19 will then push shares of VNET into new 52-week-high territory, which is bullish technical price action.

I would simply avoid VNET 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 $25.04 a share with high volume. If we get that move, then VNET will set up to re-test or possibly take out its next major support levels at $22.59 to its 200-day moving average of $21.11 a share.

Aeropostale

Another potential earnings short-squeeze candidate is mall-based specialty retailer Aeropostale (ARO), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Aeropostale to report revenue of $409.90 million on a loss of 71 cents per share.

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The current short interest as a percentage of the float for Aeropostale is extremely high at 40.6%. That means that out of the 51.41 million shares in the tradable float, 20.90 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of ARO could easily experience a monster short-squeeze post-earning as the bears rush to cover some of their trades.

From a technical perspective, ARO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern $4.30 to $4.31 a share. If that major support level can hold post-earnings, then shares of ARO could easily explode higher and trigger a major breakout trade above some key near-term overhead resistance levels.

If you're bullish on ARO, 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 $4.94 to $5.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.93 million shares. If that breakout begins post-earnings, then AEO will set up to re-test or possibly take out its next major overhead resistance levels at $5.43 to $6.50 a share. Any high-volume move above $6.50 will then give ARO a chance to re-fill some of its previous gap-down-day zone from March that started at $7.50 a share.

I would avoid ARO 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 $4.31 to its 52-week low of $4.30 a share with high volume. If we get that move, then AEO will set up to enter new 52-week-low territory, which is bearish technical price action.

Best Buy

Another earnings short-squeeze prospect is Best Buy (BBY), a multi-national, multi-channel retailer of technology products, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Best Buy to report revenue of $9.20 billion on earnings of 20 cents per share.

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The current short interest as a percentage of the float for Best Buy is very high at 10.4%. That means that out of the 286.89 million shares in the tradable float, 29.50 million shares are sold short by the bears. If Best Buy can deliver the earnings news the bulls are looking for, then shares of BBY could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, BBY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating for the last two months and change, with shares moving between $23.87 on the downside and $27.93 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a major breakout trade for shares of BBY.

If you're bullish on BBY, 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 $26.75 to $27.93 a share and then once it takes out more key resistance at 28.02 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6.45 million shares. If that breakout materializes post-earnings, then BBY will set up to re-fill some of its previous gap-down-day zone from January that started just above $36 a share.

I would simply avoid BBY 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 $25.01 to $23.87 a share with high volume. If we get that move, then BBY will set up to re-test or possibly take out its 52-week low of $22.15 a share. Any high-volume move below that level will then push shares of BBY into new 52-week-low territory, which is bearish technical price action.

Aruba Networks

My final earnings short-squeeze play is enterprise mobility solutions provider Aruba Networks (ARUN), which is set to release numbers on Thursday after the market close Wall Street analysts, on average, expect Aruba Networks to report revenue of $180.72 million on earnings of 20 cents per share.

Just yesterday, Imperial Capital initiated coverage on shares of Aruba Networks with an outperform rating and a $23 per share price target. Also, two weeks ago Pacific Crest said jt expects Aruba's revenue growth to accelerate to 20%. The firm has a $27 per share price target and an outperform rating on the stock.

The current short interest as a percentage of the float for Aruba Networks is pretty high at 11.7%. That means that out of the 102.04 million shares in the tradable float, 11.98 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of ARUN could easily jump sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, ARUN is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock is just starting to flirt with its 50-day moving average at $19.69 a share and it's starting to push within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're in the bull camp on ARUN, 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 $20.99 to $21.21 a share and then once it clears more resistance at $22.10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.93 million shares. If that breakout triggers post-earnings, then ARUN will set up to re-test or possibly take out its 52-week high at $23.58 a share. Any high-volume move above that level will then give ARUN a chance to tag its next major overhead resistance level at $26.78 a share.

I would avoid ARUN 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 $18.83 a share and then below more support at $18.04 a share with high volume. If we get that move, then ARUN will set up to re-test or possibly take out its next major support levels at $17 to $15.97 a share. Any high-volume move below those levels will then give ARUN a chance to tag $14 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.