Stock Quotes in this Article: ATU, AYI, DMND, GPN, PAYX

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.

Diamond Foods

My first earnings short-squeeze trade idea is packaged food player Diamond Foods (DMND), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $192.53 million on a loss of 3 cents per share.

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Just recently, BB&T Capital upgraded shares of Diamond Foods to buy from hold based on valuation, top-line growth and improving margins. The firm noted that Diamond Foods is a potential takeover target and slapped a $28 per share price target on the stock.

The current short interest as a percentage of the float Diamond Foods is extremely high at 29%. That means that out of the 18.07 million shares in the tradable float, 5.91 million shares are sold short by the bears. This is a high short interest and low float situation stock. Any bullish earnings news could easily spark a monster short-covering rally for shares of DMND post-earnings.

From a technical perspective, DMND is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $19.01 to its recent high of $25.32 a share. During that uptrend, shares of DMND have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DMND within range of triggering a big breakout trade post-earnings.

If you're bullish on DMND, 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 $25.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 312,166 shares. If that breakout hits, then DMND will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $30 to $35 a share, or even $40 a share.

I would simply avoid DMND or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $23 to $22 a share with high volume. If we get that move, then DMND will set up to re-test or possibly take out its 50-day moving average at $21.52 a share. Any high-volume move below that level will then put $19 to its 200-day at $17.59 into range for shares of DMND.

Actuant

Another potential earnings short-squeeze play is industrial products and systems maker Actuant (ATU), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Actuant to report revenue $328.79 million on earnings of 50 cents per share.

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The current short interest as a percentage of the float for Actuant is pretty high at 12%. That means that out of the 67.83 million shares in the tradable float, 8.12 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.7%, or by about 212,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ATU could easily rip sharply higher post-earnings as the bears rush to cover some of those trades.

From a technical perspective, ATU 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 $29.20 to its recent high of $39.69 a share. During that uptrend, shares of ATU have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ATU within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on ATU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above $39 to its 52-week high at $39.73 a share high volume. Look for volume on that move that hits near or above its three-month average action of 444,169 shares. If that breakout hits, then ATU will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would simply avoid ATU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $36.75 a share with high volume. If we get that move, then ATU will set up to re-test or possibly take out its next major support levels at $34 to its 200-day at $32.55 a share.

Acuity Brands

One potential earnings short-squeeze candidate 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 $569.33 million on earnings of $1.02 per share.

Just recently, UBS downgraded shares of Acuity Brands to neutral from buy based on valuation. The firm also raised its price target on the stock to $95 from $91.

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The current short interest as a percentage of the float for Acuity Brands is pretty high at 8.2%. That means that out of the 41.76 million shares in the tradable float, 3.46 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of AYI could jump sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, AYI 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 $68.86 to its recent high of $94.09 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 $93 a share to its 52-week high at $94.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 270,806 shares. If that breakout hits, then AYI will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $105 to $110 a share, or even $115 a share.

I would avoid AYI 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 $88.24 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 $84 to $79 a share.

Paychex

Another earnings short-squeeze prospect is payroll, human resources and benefits outsourcing solutions provider Paychex (PAYX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Paychex to report revenue of $605.56 million on earnings of 43 cents per share.

During the last four quarters, revenue at Paychex has increased by 3% on average year-over-year. For the second quarter, the company recorded its biggest gain in revenue, when it jumped by 4% from the year-earlier period.

The current short interest as a percentage of the float for Paychex stands at 5.3%. That means that out of the 327.15 million shares in the tradable float, 17.46 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a sharp short-covering rally if the bulls get the earnings news they're looking for.

From a technical perspective, PAYX 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 $34.34 a share to its recent high of $41.24 a share. During that uptrend, shares of PAYX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PAYX within range of triggering a near-term breakout trade post-earnings.

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 to its 52-week high at $41.24 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.96 million shares. If that breakout hits, then PAYX will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would simply avoid PAYX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $39.78 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 $36.80 to its 200-day at $36.05 a share.

Global Payments

My final earnings short-squeeze play is full service restaurant operator Global Payments (GPN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Global Payments to report revenue of $623.79 million on earnings of 95 cents per share.

Just recently, Sterne Agree said that Global Payments will report first-quarter results that are at least in-line with expectations. The firm thinks Global Payments' multiple can expand a few points if it reports in-line results, and it kept a buy rating on the stock.

The current short interest as a percentage of the float for Global Payments sits at 5.1%. That means that out of the 74.81 million shares in the tradable float, 3.85 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.3%, or by about 262,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of GPN could spike sharply higher post-earnings as the bears jump to cover some of those bets.

From a technical perspective, GPN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $44.94 a share to its recent high of $50.75 a share. During that uptrend, shares of GPN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GPN within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on GPN, 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 $51.24 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 668,334 shares. If that breakout hits, then GPN will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would avoid GPN 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 $49 to its 50-day at $48.59 a share with high volume. If we get that move, then GPN will set up to re-test or possibly take out its next major support levels at its 200-day at $47.75 a share to $45 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.