Stock Quotes in this Article: AYI, CAMP, PAYX, PKE, STZ

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.

Acuity Brands

My first earnings short-squeeze play is lighting solutions provider Acuity Brands (AYI), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Acuity Brands to report revenue of $609.09 million on earnings of $1.12 per share.

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During the last quarter, LED orders more than doubled year-over-year, and earnings rose 21% to 75 cents per share vs. estimates of 83 cents per share, and revenue grew 12% to $546.2 million vs. estimates of $553.9 million.

The current short interest as a percentage of the float for Acuity Brands is notable at 6%. That means that out of the 42.35 million shares in the tradable float, 2.55 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a sharp short-covering rally post-earnings as the bears move to cover some of their trades.

From a technical perspective, AYI is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending strong over the last two months, with shares moving higher from its low of $116.77 to its recent high of $138.21 a share. During that uptrend, shares of AYI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AYI within range of triggering a major breakout trade post-earnings.

If you're bullish on AYI, 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 $138.21 to $140.51 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 470,309 shares. If that breakout begins post-earnings, then AYI will set up to re-test or possibly take out its next major overhead resistance levels at $143.75 to its 52-week high of $146.28 a share. Any high-volume move above those levels will then give AYI a chance to tag or trend well north of $150 a share.

I would simply avoid AYI 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 $132.50 a share with high volume. If we get that move, then AYI will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $126.92 to $120 a share.

CalAmp

Another potential earnings short-squeeze trade idea is wireless communications player CalAmp (CAMP), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect CalAmp to report revenue $57.98 million on earnings of 18 cents per share.

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Just this morning, FBR Capital said it views CalAmp's guidance for its upcoming first-quarter earnings report as conservative, and it recommended owning the stock ahead of the report. The firm reiterated an outperform rating on the stock with a $28 per share price target.

The current short interest as a percentage of the float for CalAmp is very high at 9%. That means that out of the 33.82 million shares in the tradable float, 2.68 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.4%, or by about 438,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CAMP could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, CAMP is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $14.74 to its intraday high of $21.87 a share. During that uptrend, shares of CAMP have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CAMP within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on CAMP, 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 at around $22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 961,777 shares. If that breakout kicks off post-earnings, then CAMP will set up to re-fill some of its previous gap-down-day zone from April that started near $26 a share. Any high-volume move above $26 will then give CAMP a chance to tag $29 to $32 a share.

I would simply avoid CAMP 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 $19.13 a share with high volume. If we get that move, then CAMP will set up to re-test or possibly take out its next major support levels at $17.81 to $16, or even its 52-week low of $14.68 a share.

Paychex

Another potential earnings short-squeeze candidate is human resource, payroll, and benefit outsourcing solutions provider Paychex (PAYX), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Paychex to report revenue of $617.35 million on earnings of 40 cents per share.

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The current short interest as a percentage of the float for Paychex is notable at 5%. That means that out of the 325.28 million shares in the tradable float, 15.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.8%, or by about 1.81 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of PAYX could easily explode sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, PAYX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is just starting to bounce higher right off its 50-day moving average and back above its 200-day moving average. That move is quickly pushing shares of PAYX within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on PAYX, 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 $41.99 to $43 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.97 million shares. If that breakout materializes post-earnings, then PAYX will set up to re-test or possibly take out its 52-week high of $45.95 a share. Any high-volume move above that level will then give PAYX a chance to tag or trend north of $60 a share.

I would avoid PAYX 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 $39.45 a share with high volume. If we get that move, then PAYX will set up to re-test or possibly take out its next major support levels at its 52-week low of $36.32 to $34.55 a share.

Park Electrochemical

Another earnings short-squeeze prospect is semiconductor equipment and materials player Park Electrochemical (PKE), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Park Electrochemical to report revenue of $49.04 million on earnings of 34 cents per share.

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The current short interest as a percentage of the float for Park Electrochemical stands at 2%. That means that out of the 20.47 million shares in the tradable float, 420,000 shares are sold short by the bears. This is far from a huge short interest, but with Park Electrochemical's small float it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, PKE 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 three months, with shares moving between $24.03 on the downside and $29.43 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern post-earnings could trigger a big breakout trade for shares of PKE.

If you're bullish on PKE, 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 $28.50 to $29.43 a share and then once it takes out its 52-week high of $30.64 a share with strong volume. Look for volume on that move that hits near or above its three-month average volume of 56,975 shares. If that breakout hits post-earnings, then PKE will set up to enter new 52-week-high territory above $30.64, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40, or even $45 a share.

I would simply avoid PKE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day at $27.04 and its 200-day at $26.83 a share with high volume. If we get that move, then PKE will set up to re-test or possibly take out its next major support levels at $25.50 to $24 a share.

Constellation Brands

My final earnings short-squeeze play is beer, wine and spirits producer and marketer Constellation Brands (STZ), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Constellation Brands to report revenue of $1.41 billion on earnings of 98 cents per share.

Just this morning, RBC Capital said it expects Constellation Brands to report very strong first-quarter margins due to positive pricing trends. The firm thinks the company's first-quarter EPS can surpass expectations. It maintained a $100 price target on the stock and an outperform rating.

The current short interest as a percentage of the float for Constellation Brands sits at 1.5%. That means that out of the 159.18 million shares in the tradable float, 2.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by about 94,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of STZ could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, STZ 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 $76.26 to its recent high of $88.60 a share. During that uptrend, shares of STZ have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of STZ within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on STZ, 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 $88.60 a share (or above Tuesday's intraday high if greater) with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.33 million shares. If that breakout triggers post-earnings, then STZ will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $100 to $110 a share.

I would avoid STZ 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 $86 a share with high volume. If we get that move, then STZ will set up to re-test or possibly take out its next major support level at its 50-day moving average of $82.84 a share. Any high-volume move below that level will then give STZ a chance to tag its next major support levels at $78 to $76 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.