Stock Quotes in this Article: CCL, KMX, RHT, SNX, ASNA

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.

>>5 Rocket Stocks to Buy for September Gains

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.

>>5 Stocks Ready to Break Out

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.

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.

>>How to Win With the Twitter IPO

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

Ascena Retail Group

My first earnings short-squeeze trade idea is Ascena Retail Group (ASNA), a specialty retailer of apparel for women and tween girls, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Ascena Retail Group to report revenue of $1.17 billion on earnings of 21 cents per share.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float Ascena Retail Group is notable at 5.4%. That means that out of the 126.24 million shares in the tradable float, 6.87 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.4%, or by 349,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of ASNA could soar sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, ASNA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending modestly for the last month, with shares moving higher from its low of $16.15 to its intraday high of $17.48 a share. During that uptrend, shares of ASNA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ASNA within range of triggering a near-term breakout trade post earnings.

If you're bullish on ASNA, 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 at $17.51 a share to its 200-day moving average at $18.02 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.17 million shares. If that breakout hits, then ASNA will set up to re-test or possibly take out is next major overhead resistance levels at $19.33 to $20.50 a share. Any high-volume move above those levels will then give ASNA a chance to tag $22 to $23 a share.

I would simply avoid ASNA 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 $16.40 to its 52-week low at $15.95 a share with high volume. If we get that move, then ASNA will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $14 to $13 a share.

Synnex

Another potential earnings short-squeeze play is technology services provider Synnex (SNX), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Synnex to report revenue of $2.72 billion on earnings of 95 cents per share.

>>4 Tech Stocks Triggering Breakout Trades

The current short interest as a percentage of the float for Synnex stands at 4.3%. That means that out of the 26.20 million shares in the tradable float, 1.14 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 large short-squeeze for SNX post-earnings.

From a technical perspective, SNX 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 month, with shares moving higher from its low of $46.87 to its intraday high of $64.50 a share. During that move, shares of SNX have been consistently making higher lows and higher highs, which is bullish technical price action.

If you're in the bull camp on SNX, 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 $64.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 232,502 shares. If that breakout triggers, then SNX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $70 to $75 a share.

I would simply avoid SNX 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 $60 a share with high volume. If we get that move, then SNX will set up to re-test or possibly take out its next major support levels at $52 a share to its 50-day moving average at $51.12 a share.

Carnival

One potential earnings short-squeeze candidate is cruise line operator Carnival (CCL), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Carnival to report revenue of $4.65 billion on earnings of $1.30 per share.

>>5 Stocks Insiders Love Right Now

The current short interest as a percentage of the float for Carnival stands at 4.3%. That means that out of the 563.25 million shares in the tradable float, 17.72 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.4%, or by 2.09 million shares. If the bears are caught pressing their bets into a strong quarter, then shares of CCL could jump sharply higher post-earnings.

From a technical perspective, CCL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending sideways for the last two months, with shares moving between $35.11 on the downside and $37.96 on the upside. A high-volume move above the upper-end of its recent range could trigger a big breakout trade for shares of CCL post-earnings.

If you're bullish on CCL, 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 $37.96 a share to its 52-week high at $39.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.46 million shares. If that breakout triggers, then CCL will set up enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $48 a share.

I would avoid CCL or look for short-biased trades if after earnings it fails to trigger that move and then drops back below its 50-day moving average of $36.67 a share with high volume. If we get that move, then CCL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $35.38 a share to more support at $35.11 a share. Any high-volume move below those levels will then give CCL a chance to tag $33 to $32 a share.

CarMax

Another earnings short-squeeze prospect is used cars retailer CarMax (KMX), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $3.16 billion on earnings of 57 cents per share.

>>5 Big Trades to Take as the Fed Hits the Gas

Just recently, Oppenheimer increased its price target on CarMax to $61 from $52 as the firm thinks the company's used car comps are strengthening as macro pressures and supply constraints ease and internal initiatives take hold. The firm expects the company's sales recovery to continue for some time.

The current short interest as a percentage of the float for CarMax sits at 2.6%. That means that out of the 222.25 million shares in the tradable float, 5.88 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of KMX could spike notably higher post-earnings

From a technical perspective, KMX 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 six months, with shares moving higher from its low of $40.34 to its recent high of $52.27 a share. During that uptrend, shares of KMX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KMX within range of triggering a near-term breakout trade.

If you're bullish on KMX, 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 $52 to its 52-week high at $52.27 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.13 million shares. If that breakout triggers, then KMX will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $60 to $65 a share.

I would simply avoid KMX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $49.07 a share with high volume. If we get that move, then KMX will set up to re-test or possibly take out its next major support levels at $47 to $45 a share. Any high-volume move below those levels will then give KMX a chance to tag its 200-day moving average at $43.86 a share.

Red Hat

My final earnings short-squeeze play is global provider of open source software solutions Red Hat (RHT), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Red Hat to report revenue of $372.07 million on earnings of 33 cents per share.

The current short interest as a percentage of the float for Red Hat sits at 2.4%. That means that out of the 188.21 million shares in the tradable float, 4.58 million shares are sold short by the bears. Any bullish earnings news could easily spark a decent short-covering rally for shares of RHT post-earnings.

From a technical perspective, RHT 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 $44.95 to its recent high of $54.38 a share. During that move, shares of RHT have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RHT within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on RHT, 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 $54.38 to $55.59 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.24 million shares. If that breakout triggers, then RHT will set up to re-test or possibly take out its next major resistance levels $57 to $60 a share. Any high-volume move above those levels will then put $63 to $65 into range for shares of RHT.

I would avoid RHT 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 at $51.54 and its 200-day moving average at $50.98 a share with high volume. If we get that move, then RHT will set up to re-test or possibly take out its next major support levels at $50 to $48 a share. Any high-volume move below those levels will then put $47 to $45 into range for shares of RHT.

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.


RELATED LINKS:







Follow Stockpickr on Twitter and become a fan on Facebook.

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.