Stock Quotes in this Article: DPZ, MTG, SCSS, SNDK, UMPQ

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.

Select Comfort

My first earnings short-squeeze play is bed manufacturer and retailer Select Comfort (SCSS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Select Comfort to report revenue of $277.47 million on earnings of 43 cents per share.

The current short interest as a percentage of the float Select Comfort is extremely high at 18.2%. That means that out of the 53.98 million shares in the tradable float, 9.82 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 32.7%, or by about 2.41 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of SCSS could easily explode to the upside post-earnings as the shorts rush to cover some of their bets.

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From a technical perspective, SCSS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways inside of a consolidation pattern for the last month and change, with shares moving between $23.81 on the downside and $26.47 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of SCSS.

If you're bullish on SCSS, 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 $26.47 to $27.84 a share and then once it clear some past resistance at $28.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.15 million shares. If that breakout hits, then SCSS will set up to re-test or possibly take out its next major overhead resistance levels at $34.38 to $35.60 a share.

I would simply avoid SCSS 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 at $24.01 a share to its 200-day moving average at $22.75 a share with high volume. If we get that move, then SCSS will set up to re-test or possibly take out its next major support levels at $20.48 to $18 a share.

MGIC Investment

Another potential earnings short-squeeze trade is private mortgage insurer player MGIC Investment (MTG), which is set to release its numbers Wednesday before the market open. Wall Street analysts, on average, expect MGIC Investment to report revenue of $260.92 million on a loss of 13 cents per share.

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The current short interest as a percentage of the float for MGIC Investment is pretty high at 9.8%. That means that out of the 331.89 million shares in the tradable float, 31.09 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by about 1.62 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of MTG could experience a big short-squeeze post-earnings as shorts jump to cover some of their positions.

From a technical perspective, MTG 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 few weeks, with shares moving higher from its low of $6.62 to its recent high of $7.53 a share. During that uptrend, shares of MTG have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MTG within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on MTG, then I would wait until after its report and look for long-biased trades if this stock manages to take out some near-term overhead resistance levels at $7.53 to $7.94 a share and then once it clears its 52-week high at $8.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 7.93 million shares. If that breakout triggers, then MTG will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $10 to $12 a share.

I would simply avoid MTG 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 $7 to $6.62 a share with high volume. If we get that move, then MTG will set up to re-test or possibly take out its next major support levels at $6 to $5.50 a share.

SanDisk

One potential earnings short-squeeze candidate is data storage solutions player SanDisk (SNDK), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SanDisk to report revenue of $1.57 billion on earnings of $1.31 per share.

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The current short interest as a percentage of the float for SanDisk is pretty high at 8.5%. That means that out of the 239.80 million shares in the tradable float, 20.36 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SNDK could easily explode higher post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, SNDK 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 and change, with shares soaring higher from its low of $53.80 to its recent high of $63.39 a share. During that uptrend, shares of SNDK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SNDK within range of triggering a major breakout trade post-earnings.

If you're bullish on SNDK, 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 $63.39 to its 52-week high at $63.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.66 million shares. If that breakout triggers, then SNDK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $75 a share.

I would avoid SNDK or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below some key near-term support levels at $60 to its 50-day moving average at $58.77 a share with high volume. If we get that move, then SNKD will set up to re-test or possibly take out its next major support level at its 200-day moving average of $55.49 a share to more support around $54 to $53 a share.

Domino's Pizza

Another earnings short-squeeze prospect is pizza delivery player Domino's Pizza (DPZ), which is set to release numbers on Tuesday before the market open Wall Street analysts, on average, expect Domino's Pizza to report revenue of $402.56 million on earnings of 52 cents per share.

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Recently, Oppenheimer downgraded shares of Domino's Pizza to perform from outperform, citing valuation since the stock has tripled over the last two years. The firm says it remains impressed with the execution of Domino's' management but would like to see the pizza chain's growth rate catch up to its valuation.

The current short interest as a percentage of the float for Domino's Pizza stands at 5.6%. That means that out of the 49.06 million shares in the tradable float, 3.11 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then this stock could easily rip sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, DPZ 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 soaring higher from its low of $48.77 to its recent high of $69.92 a share. During that uptrend, shares of DPZ have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DPZ within range of triggering a big breakout trade post-earnings.

If you're bullish on DPZ, 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 $69.92 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 595,915 shares. If that breakout hits, then DPZ will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $75 to $80 a share.

I would avoid DPZ 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 $66.54 to its 50-day moving average at $64.60 a share with high volume. If we get that move, then DPZ will set up to re-test or possibly take out its next major support levels at $60 to $58 a share. Shares of DPZ could even re-test its 200-day moving average at $55.88 a share if those levels get taken out with volume.

Umpqua

My final earnings short-squeeze play is banking player Umpqua (UMPQ), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Umpqua to report revenue of $140.37 million on earnings of 26 cents per share.

The current short interest as a percentage of the float for Umpqua is very high at 14.2%. That means that out of the 110.60 million shares in the tradable float, 15.67 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 185.5%, or by about 10.18 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of UMPQ could experience a large short-squeeze post-earnings.

From a technical perspective, UMPQ is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending modestly over the last month, with shares moving higher from its low of $15.56 to its intraday high of $16.74 a share. During that move, shares of UMPQ have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UMPQ within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on UMPQ, 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 $17.30 to $17.32 a share and then once it clears its 52-week high at $17.48 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 hits, then UMPQ will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $20 to $23 a share.

I would avoid UMPQ 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 to $15.56 a share with high volume. If we get that move, then UMPQ will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $14.05 to $13 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.