Stock Quotes in this Article: AZPN, CREE, JCP, SINA, JD

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.

JD.com

My first earnings short-squeeze play is China-based online retailer JD.com (JD), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect JD.com to report revenue of $3.71 billion.

The current short interest as a percentage of the float for JD.com is notable at 7.7%. That means that out of the 268.59 million shares in the tradable float, 20.68 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.3%, or by about 854,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of JD could easily jump sharply higher post-earnings as the shorts move to cover some of their trades.

From a technical perspective, JD is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $20 to its recent high of $31.22 a share. During that uptrend, shares of JD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JD within range of triggering a major breakout trade post-earnings.

If you're bullish on JD, 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 $29 to $30.35 a share and then once it clears its all-time high of $31.22 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 6.64 million shares. If that triggers post-earnings, then JD 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, or even $45 a share.

I would simply avoid JD 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 $27.71 a share to more key support at $27.30 a share with high volume. If we get that move, then JD will set up to re-test or possibly take out its next major support levels at $24.92 to $24.03 a share, or even $22 a share.

Read More: 5 Stocks Spiking on Big Volume

J.C. Penney

Another potential earnings short-squeeze trade is department stores player J.C. Penney (JCP), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect J.C. Penney to report revenue $2.78 billion on a loss of 93 cents per share.

The current short interest as a percentage of the float for J.C. Penney is extremely high at 27.3%. That means that out of the 290.73 million shares in the tradable float, 79.38 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of JCP could easily see a sharp short-covering rally post-earnings.

From a technical perspective, JCP is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $8.28 to its recent high of $9.78 a share. During that uptrend, shares of JCP have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JCP within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on JCP, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $9.78 to $9.93 a share and then above $10.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 16.41 million shares. If that breakout kicks off post-earnings, then JCP will set up to re-test or possibly take out its next major overhead resistance levels at $12 to $14.65 a share.

I would simply avoid JCP 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 $8.91 a share to its 200-day moving average of $8.26 a share with high volume. If we get that move, then JCP will set up to re-test or possibly take out its next major support levels at $7.50 to $7.04 a share.

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Cree

Another potential earnings short-squeeze candidate is semiconductor player Cree (CREE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue of $444.11 million on earnings of 41 cents per share.

The current short interest as a percentage of the float for Cree is pretty high at 10.5%. That means that out of the 118.86 million shares in the tradable float, 12.47 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CREE could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, CREE is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock recently started to spike higher right above its 50-day moving average of $48.83 a share. That spike is starting to push shares of CREE within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on CREE, 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 $50.60 to $50.63 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.48 million shares. If that breakout materializes post-earnings, then CREE will set up to re-test or possibly take out its next major overhead resistance levels at $53.33 to its 200-day moving average of $55 a share. Any high-volume move above $55 will then give CREE a chance to re-fill its previous gap-down-day zone from April that started near $59 a share.

I would avoid CREE or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average at $48.83 a share to with high volume. If we get that move, then CREE will set up to re-test or possibly take out its next major support levels at $46.33 to its 52-week low at $44.52 a share. Any high-volume move below $44.52 will then push shares of CREE into new 52-week-low territory, which is bearish technical price action.

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Aspen Technology

Another earnings short-squeeze prospect is process optimization software solutions player Aspen Technology (AZPN), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Aspen Technology to report revenue of $96.61 million on earnings of 21 cents per share.

The current short interest as a percentage of the float for Aspen Technology is notable at 3.1%. That means that out of the 91.52 million shares in the tradable float, 2.90 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.8%, or by about 79,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of AZPN could easily rip sharply higher post-earnings as the shorts move quick to cover some of their trades.

From a technical perspective, AZPN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways for the last three months, with shares moving between $41 on the downside and $47.63 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 AZPN.

If you're bullish on AZPN, 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 $46.20 to $47.63 a share and then above its 52-week high at $48.39 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 499,047 shares. If that breakout begins post-earnings, then AZPN 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 AZPN 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 $45.04 a share with high volume. If we get that move, then AZPN will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $42.86 to $41 a share. Any high-volume move below $41 will then give AZPN a chance to re-fill some of its previous gap-up-day zone from April that started near $37 a share.

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Sina

My final earnings short-squeeze trade idea is China-based online media player Sina (SINA), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Sina to report revenue of $179.20 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for SINA is notable at 4.5%. That means that out of the 64.37 million shares in the tradable float, 2.95 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, SINA is currently trending above its 50-day moving average and well below is 200-day moving average, which is neutral trendwise. This stock has been consolidating and trending sideways for the last month and change, with shares moving between $44.57 on the downside and $52.77 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 SINA.

If you're in the bull camp on SINA, 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 $48.98 to $51.14 a share and then above $52.77 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.38 million shares. If that breakout develops post-earnings, then SINA will set up to re-test or possibly take out its next major overhead resistance levels at $58.20 to $60 a share, or even its 200-day moving average of $62.78 a share.

I would avoid SINA 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 47.35 a share to more support at $44.57 a share with high volume. If we get that move, then SINA will set up to re-test or possibly take out its next major support levels at $43.40 to its 52-week low at $42.40 a share. Any high-volume move below $42.40 will then push shares of SINA into 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.