Stock Quotes in this Article: HDS, TPLM, ULTA, UNFI, FRAN

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.

Triangle Petroleum

My first earnings short-squeeze trade idea is energy player Triangle Petroleum (TPLM), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Triangle Petroleum to report revenue of $95.86 million on earnings of 12 cents per share.

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The current short interest as a percentage of the float for Triangle Petroleum is very high at 16%. That means that out of the 75.05 million shares in the tradable float, 10.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.6%, or by about 624,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of TPLM could easily explode sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, TPLM 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 three months, with shares moving higher from its low of $7.63 to its recent high of $10.59 a share. During that uptrend, shares of TPLM have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TPLM within range of triggering a big breakout trade post-earnings.

If you're bullish on TPLM, 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 $10.42 to $10.59 a share and then once it takes out more resistance $11.36 to its 52-week high at $11.66 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.44 million shares. If that breakout triggers post-earnings, then TPLM will set up to enter new 52-week-high territory above $11.66, which is bullish technical price action.

I would simply avoid TPLM 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 $9.37 to its 200-day moving average of $9.13 a share high volume. If we get that move, then TPLM will set up to re-test or possibly take out its next major support levels at $8.25 to $7.75 a share.

Francesca's

Another potential earnings short-squeeze play is chain of retail boutiques operator Francesca's (FRAN), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Francesca's to report revenue $88.11 million on earnings of 22 cents per share.

Recently, Canaccord identified an opportunity to buy Francesca's before momentum builds ahead of a second-half rebound. The firm sees easier comps, a refreshed merchandise assortment and a return to expense leverage in the second half. The firm has the stock rated as a buy with a $29 per share price target.

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The current short interest as a percentage of the float for Francesca's s extremely high at 18.4%. That means that out of the 41.73 million shares in the tradable float, 7.68 million shares are sold short by the bears. This is a big short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of FRAN post-earnings.

From a technical perspective, FRAN 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 dropping from its high of $21.23 to its recent low of $14.77 a share. During that downtrend, shares of FRAN have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on FRAN, 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 $16.47 to its 50-day moving average of $16.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1 million shares. If that breakout materializes post-earnings, then FRAN will set up to re-test or possibly take out its next major overhead resistance levels at $17.34 to its 200-day moving average of $18.46 a share. Any high-volume move above those levels will then give FRAN a chance to tag $20 to $21 a share.

I would simply avoid FRAN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $14.77 a share with high volume. If we get that move, then FRAN will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets if FRAN prints new 52-week lows are $12 to $10 a share.

Ulta Salon, Cosmetics & Fragrance

Another potential earnings short-squeeze candidate is specialty retail stores operator Ulta Salon, Cosmetics & Fragrance (ULTA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect ULTA Salon, Cosmetics & Fragrance to report revenue of $699.85 million on earnings of 74 cents per share.

Recently, RW Baird said Ulta Salon's fundamentals are holding up in a challenging environment. The firm expects ULTA's first-quarter results to be near the high end of guidance, and it has an outperform rating on the stock with a $110 per share price target.

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The current short interest as a percentage of the float for ULTA Salon, Cosmetics & Fragrance stands at around 4%. That means that out of the 54.86 million shares in the tradable float, 2.53 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.7%, or by about 41,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of UTLA could easily spike sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, ULTA 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 month and change, with shares moving between $83.54 on the downside and $91.24 on the upside. Any high-volume move above the upper-end of its sideways trading chart pattern post-earnings could trigger a near-term breakout trade for shares of UTLA.

If you're bullish on ULTA, 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 $88 to its 50-day moving average of $89.28 a share and then once it clears more resistance at $90.32 to $91.24 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.25 million shares. If that breakout triggers post-earnings, then ULTA will set up to re-test or possibly take out its next major overhead resistance levels at $98.50 to its 200-day moving average of $100.97 a share. Any high-volume move above those levels will then give ULTA a chance to tag $105 to $107 a share.

I would avoid UTLA 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 $83.54 to $82 a share with high volume. If we get that move, then UTLA will set up to re-test or possibly take out its next major support level at its 52-week low of $80.35 a share. Any high-volume move below $80.35 a share will then push ULTA into new 52-week-low territory, which is bearish technical price action.

United Natural Foods

Another earnings short-squeeze prospect is natural, organic and specialty foods and non-food products retailer United Natural Foods (UNFI), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect United Natural Foods to report revenue of $1.78 billion on earnings of 73 cents per share.

Recently, Jefferies recommended investors rotate into United Natural Foods after Whole Foods (WFM) acknowledged competitive pressures on its second-quarter earnings call. The firm views UNFI as a lower-risk way to play the 8% to 10% demand growth in natural and organic food. Jefferies said it sees potential for a guidance increase from UNFI when the company reports third-quarter results, and it has a buy rating on the stock with a $78 per share price target.

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The current short interest as a percentage of the float for United Natural Foods is notable at 5%. That means that out of the 47.54 million shares in the tradable float, 2.50 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if United Natural Foods delivers bullish earnings results.

From a technical perspective, UNFI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending a bit for the last month, with shares moving higher from its low of $62.20 to its intraday high of $69.85 a share. During that move, shares of UNFI have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UNFI within range of triggering a near-term breakout trade post-earnings.

If you're bullish on UNFI, 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 $70.50 to $73 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 333,805 shares. If that breakout starts post-earnings, then UNFI will set up to re-test or possibly take out its 52-week high at $79.64 a share.

I would simply avoid UNFI 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 $67.69 a share and below more near-term support at $64 a share with high volume. If we get that move, then UNFI will set up to re-test or possibly take out its next major support levels at $62.20 to $58 a share.

HD Supply

My final earnings short-squeeze play is industrial distribution player HD Supply (HDS), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect HD Supply to report revenue of $2.15 billion on earnings of 18 cents per share.

The current short interest as a percentage of the float for HD Supply sits at 3%. That means that out of the 94 million shares in the tradable float, 2.75 million shares are sold short by the bears. This is not a big short interest, but it's more than enough to spark a decent short-covering rally if the bulls get the earnings news they're looking for from HD Supply.

From a technical perspective, HDS 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 four months, with shares moving higher from its low of $20.59 to its recent high of $28.87 a share. During that uptrend, shares of HDS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of HDS within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on HDS, 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 of $28.87 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.46 million shares. If that breakout triggers, then HDS will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40 a share.

I would avoid HDS 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 $26.12 to $25 a share with high volume. If we get that move, then HDS will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $23.31 to $21 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.