Stock Quotes in this Article: GRPN, TUMI, SCTY, FEYE, BREW

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.




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.

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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.

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.

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With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Groupon

My first earnings short-squeeze play is local e-commerce marketplace player Groupon (GRPN), which is set to release numbers on Tuesday after the market close (check out Groupon's earnings preview here. Wall Street analysts, on average, expect Groupon to report revenue of $761.80 million on earnings of 1 cent per share.

Last month, B. Riley upgraded shares of Groupon to buy from neutral and raised its price target to $9.50 from $6 a share.

The current short interest as a percentage of the float for Groupon is pretty high at 20.8%. That means that out of the 423.98 million shares in the tradable float, 88.38 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.8%, or by about 7.88 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of GRPN could easily soar sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, GRPN is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a triple bottom chart pattern at $6.12, $6.22 and $6.09 a share. Since that bottom, shares of GRPN have started to uptrend and break out above some near-term overhead resistance at $6.66 a share. That move has now pushed shares of GRPN within range of triggering a near-term breakout trade post-earnings.

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If you're bullish on GRPN, 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 $7.16 to $7.24 a share and then above more resistance at $7.75 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 16.94 million shares. If that breakout hits post-earnings, then GRPN will set up to re-test or possibly take out its next major overhead resistance levels at $8.50 to around $9 a share. Any high-volume move above $9 will then give GRPN a chance to re-fill some of its previous gap-down-day zone from February that started near $10.50 a share.

I would simply avoid GRPN 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 $6.31 a share and then below those triple bottom support levels with high volume. If we get that move, then GRPN will set up to re-test or possibly take out its next major support levels at $5.46 to its 52-week low at $5.18 a share.

Groupon was also featured yesterday in "3 Huge Stocks to Trade (or Not)."

Craft Brew Alliance

Another potential earnings short-squeeze trade idea is craft-brewed beers producer Craft Brew Alliance (BREW), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Craft Brew Alliance to report revenue $54.90 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for Craft Brew Alliance is pretty high at 11%. That means that out of the 8.68 million shares in the tradable float 959,500 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.2%, or by about 30,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BREW could easily rip sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, BREW 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 consolidating and trending sideways for the last month or so, with shares moving between $10.61 on the downside and $11.91 on the upside. Any high-volume move above the upper end of that range post-earnings could trigger a big breakout trade for shares of BREW.

If you're in the bull camp on BREW, 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 $11.48 to $11.75 a share and then above $11.91 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 79,783 shares. If that breakout kicks off post-earnings, then BREW will set up to re-test or possibly take out its next major overhead resistance levels at $13.50 to its 200-day moving average of $14.28 a share.

I would simply avoid BREW 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 $10.61 to $10.07 a share with high volume. If we get that move, then BREW will set up to re-test or possibly take out its next major support level at its 52-week low of $9.41 a share.

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Tumi

Another potential earnings short-squeeze candidate is travel and business products and accessories player Tumi (TUMI), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Tumi to report revenue of $124.31 million on earnings of 19 cents per share.

The current short interest as a percentage of the float for Tumi is pretty high at 10.9%. That means that out of the 54.13 million shares in the tradable float, 5.90 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.6%, or by about 708,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of TUMI could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, TUMI 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 $19.25 to its recent high of $21.54 a share. During that uptrend, shares of TUMI have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TUMI within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on TUMI, 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 $21.54 to $21.57 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 496,795 shares. If that breakout begins post-earnings, then TUMI will set up to re-test or possibly take out its next major overhead resistance levels at $24 to $25, or even its 52-week high at $26.24 a share.

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I would avoid TUMI or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average of $19.96 a share to more key near-term support at $19.25 a share with high volume. If we get that move, then TUMI will set up to re-test or possibly take out its next major support levels at $18 to its 52-week low of $17.55 a share. Any high-volume move above $17.55 will then push shares of TUMI into new 52-week-low territory, which is bearish technical price action.

SolarCity

Another earnings short-squeeze prospect is solar energy systems player SolarCity (SCTY), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect SolarCity to report revenue of $63.24 million on a loss of 99 cents per share.

The current short interest as a percentage of the float for SolarCity is extremely high a 21%. That means that out of the 52.29 million shares in the tradable float, 10.98 million shares are sold short by the bears. This is a monster short interest on a stock with a low tradable float. If the bulls get the earnings news they're looking for, then shares of SCTY could easily explode sharply higher post-earnings as the bears move quick to cover some of their bets.

From a technical perspective, SCTY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last month or so, with shares moving higher from its low of $62.50 to its recent high of $74.97 a share. During that move, shares of SCTY have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SCTY within range of triggering a big breakout trade post-earnings.

If you're bullish on SCTY, 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 $74.97 to $76.06 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.19 million shares. If that breakout materializes post-earnings, then SCTY will set up to re-test or possibly take out its next major overhead resistance levels at $85 to its all-time high at $88.35 a share. Any high-volume move above $88.35 will then push shares of SCTY into new all-time-high territory, which is bullish technical price action.

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I would simply avoid SCTY or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support at $67.80 a share with high volume. If we get that move, then SCTY will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $63.73 to its 200-day moving average of $62.08 a share.

FireEye

My final earnings short-squeeze play is cybersecurity software player FireEye (FEYE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect FireEye to report revenue of $90.19 million on a loss of 60 cents per share.

The current short interest as a percentage of the float for FireEye is pretty high at 17%. That means that out of the 79.86 million shares in the tradable float, 13.59 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.2%, or by about 1.37 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of FEYE could easily trend sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, FEYE is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways for the last month or so, with shares moving between $31.88 on the downside and $37.39 on the upside. Shares of FEYE have recently started to bounce higher a bit above that range low and it's starting to push within range of triggering a big breakout trade post-earnings above the upper-end of its sideways trading chart pattern.

If you're in the bull camp on FEYE, 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 $35.66 a share to more near-term overhead resistance at $37.39 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 6.35 million shares. If that breakout gets underway post-earnings, then FEYE will set up to re-test or possibly take out its next major overhead resistance levels at $41.82 to $42.90 a share, or even $45 a share.

I would avoid FEYE 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 $32.26 to $31.88 a share and then below more key support at $30.01 a share with high volume. If we get that move, then FEYE will set up to re-test or possibly take out its next major support level at its 52-week low of $25.58 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.