Stock Quotes in this Article: GRMN, ICON, AEGR, LOCK, TWTR

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 Wall 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.

Twitter

My first earnings short-squeeze play is social media player Twitter (TWTR), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Twitter to report revenue of $283.07 million on a loss of 1 cent per share. Recently, Sterne Agee predicted a Twitter earnings beat for the second quarter, maintaining a neutral rating on the stock.

The current short interest as a percentage of the float for Twitter is notable at around 8%. That means that out of the 428.10 million shares in the tradable float, 33.86 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Twitter could easily rip sharply higher post-earnings as the bears move to cover some of their bets.

From a technical perspective, TWTR is currently trending above its 50-day moving average, which is bullish. This stock has been basing and consolidating over the last month, with shares moving sideways between $35.95 on the downside and around $40 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern could easily trigger a big breakout trade post-earnings.

If you're bullish on TWTR, 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 to $39.38 a share and then above more resistance at $40 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 30.15 million shares. If that breakout triggers post-earnings, then TWTR will set up to re-test or possibly take out its next major overhead resistance levels at $42.95 to $43.97 a share. Any high-volume move above those levels will then give TWTR a chance to tag $47 to $50 a share.

I would simply avoid TWTR 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 $36.51 a share and then below more key support at $35.95 a share high volume. If we get that move, then TWTR will set up to re-test or possibly take out its next major support levels at $32.50 to $31.62 a share, or even $30 to $29.50 a share.

Twitter was also featured recently in "5 Stocks Hedge Funds Love This Summer."

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Iconix Brand Group

Another potential earnings short-squeeze trade idea is consumer brand portfolio player Iconix Brand Group (ICON), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Iconix Brand Group to report revenue $117.08 million on earnings of 67 cents per share. Recently, Cowen initiated coverage on Iconix Brand Group with an outperform rating and a $52 per share price target on the stock.

The current short interest as a percentage of the float for Iconix Brand Group is extremely high at 20.5%. That means that out of the 44.45 million shares in the tradable float, 9.14 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're expecting, then shares of ICON could easily surge sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, ICON 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 $40.33 on the downside and $44.81 on the upside. Shares of ICON have now started to spike higher right above its 50-day moving average of $42.59 and it's quickly moving within range of triggering a big breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're in the bull camp on ICON, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $43.52 to $43.99 a share and then once it takes out its 52-week high at $44.81 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 525,362 shares. If that breakout materializes post-earnings, then ICON will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share, or even $65 a share.

I would simply avoid ICON 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 $42 to $41.33 a share and then below $40.33 a share with high volume. If we get that move, then ICON will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $39.47 to $37 a share.

Read More: 5 Large-Cap Stocks to Trade for Earnings Season Gains

Aegerion Pharmaceuticals

Another potential earnings short-squeeze candidate is biopharmaceutical player Aegerion Pharmaceuticals (AEGR), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Aegerion Pharmaceuticals to report revenue of $35.40 million on a loss of 41 cents per share.

Back in late May, Goldman Sachs initiated shares of Aegerion Pharmaceuticals with a sell rating and a $27 per share price target. The firm believes that competition will limit the growth of Aegerion's Juxtapid.

The current short interest as a percentage of the float for Aegerion Pharmaceuticals is extremely high at 24.3%. That means that out of the 28.35 million shares in the tradable float, 6.89 million shares are sold short by the bears. This is a monster short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-covering rally post-earnings for shares of AEGR.

From a technical perspective, AEGR is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently tagged a new 52-week low at $26.25 a share. Following that low, shares of AEGR have started to rebound and trend higher with the stock printing an intraday high on Friday of $30.12 a share. That rebound is starting to push shares of AEGR within range of triggering a big breakout trade post-earnings.

If you're bullish on AEGR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $31.60 a share to more near-term overhead resistance at around $33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.06 million shares. If that breakout gets set off post-earnings, then AEGR will set up to re-test or possibly take out its next major overhead resistance level at $35.46 a share to its gap-down-day high from May at $36.55 a share. Any high-volume move above $36.55 will then give AEGR a chance to re-fill some of its previous gap-down-day zone that started just above $45 a share.

I would avoid AEGR or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $27.50 to its 52-week low of $26.25 a share with high volume. If we get that move, then AEGR will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $20 to $18 a share.

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Garmin

Another earnings short-squeeze prospect is global positioning systems player Garmin (GRMN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Garmin to report revenue of $709.25 million on earnings of 76 cents per share. Recently, Citigroup raised its price target for Garmin shares to $70 and reiterated its buy rating on the stock.

The current short interest as a percentage of the float for Garmin is pretty high at around 15%. That means that out of the 121.85 million shares in the tradable float, 17.92 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of GRMN could easily spike sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, GRMN 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 over the last six months, with shares moving higher from its low of $42.33 to its recent high of $62.065 a share. During that uptrend, shares of GRMN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GRMN within range of triggering a big breakout trade post-earnings.

If you're bullish on GRMN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $58.44 to $60 a share and then once it clears its 52-week high at $62.05 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.34 million shares. If that breakout kicks off post-earnings, then GRMN will set up to enter new 52-week-high territory above $62.05, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $80 a share.

I would simply avoid GRMN or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $55.93 to $54 a share with high volume. If we get that move, then GRMN will set up to re-test or possibly take out its next major support level at its 200-day moving average of $51.56 a share.

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LifeLock

My final earnings short-squeeze play is identity theft protection services and fraud risk solutions player LifeLock (LOCK), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect LifeLock to report revenue of $113.92 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for LifeLock is very high at 17.5%. That means that out of the 56.90 million shares in the tradable float, 9.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or by about 767,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LOCK could easily explode sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, LOCK is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $12.45 to $12.30 a share. Following that bottom, shares of LOCK have started to spike higher back above its 50-day moving average at $12.53 a share and it's quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.

If you're in the bull camp on LOCK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $13.33 to $14.35 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.76 million shares. If that breakout gets underway post-earnings, then LOCK will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $16.06 to $16.20, or even $17.03 to $18 a share. Any high-volume move above $18 will then give LOCK a chance to make a run at $20 a share.

I would avoid LOCK 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 $12.53 a share to more key support at $12.30 to around $12 a share with high volume. If we get that move, then LOCK will set up to re-test or possibly take out its next major support levels at $10.92 to its 52-week low at $10.48 a share. Any high-volume move below $10.48 will then give LOCK a chance to enter new 52-week-low territory, which is bearish technical price action.

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.