Stock Quotes in this Article: CAB, CREE, MLNX, UIS, USNA

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.

Usana Health Sciences

My first earnings short-squeeze play is nutritional and personal care products maker Usana Health Sciences (USNA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect USANA Health Sciences to report revenue of $172.40 million on earnings of $1.14 per share.

The current short interest as a percentage of the float USANA Health Sciences is extremely high at 29%. That means that out of the 6.67 million shares in the tradable float, 1.95 million shares are sold short by the bears. This is a stock with a huge short interest and a very low tradable float. Any bullish earnings news could easily spark a monster short squeeze for shares of USNA post-earnings.

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From a technical perspective, USNA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last few weeks, with shares moving higher from its low of $78.94 to its intraday high of $88.73 a share. During that uptrend, shares of USNA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of USNA within range of triggering a big breakout trade post-earnings.

If you're bullish on USNA, 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 $89.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 128,383 shares. If that breakout triggers, then USNA 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 $115 a share.

I would simply avoid USNA or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $85 a share to its 50-day moving average at $82.64 a share with high volume. If we get that move, then USNA will set up to re-test or possibly take out its next major support levels at $78.94 to $76 a share, or even $73 a share.

Unisys

Another potential earnings short-squeeze trade idea is worldwide information technology player Unisys (UIS), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Unisys to report revenue $854.13 million on earnings of 40 cents per share.

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The current short interest as a percentage of the float for Unisys is pretty high at 15.3%. That means that out of the 43.14 million shares in the tradable float, 6.57 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.9%, or by about 539,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of UIS could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, UIS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last two months, with shares moving between $24.11 on the downside and $27.08 on the upside. Shares of UIS are now starting to move within range of triggering a breakout trade above the upper-end of its recent sideways chart pattern post-earnings.

If you're in the bull camp on UIS, 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 $26.51 to $27.08 a share, and then once it clears its 52-week high at $28.25 a share high volume. Look for volume on that move that hits near or above its three-month average action of 427,802 shares. If that breakout hits, then UIS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $32.50 to $35 a share.

I would simply avoid UIS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $25.39 a share and then below more key near-term support levels at $24.66 to $24.11 a share with high volume. If we get that move, then UIS will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $22.61 to $20 a share.

Cree

One 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 $392.21 million on earnings of 39 cents per share.

Just recently, Canaccord Genuity upgraded shares of CREE to buy from hold and lifted its price target to $80 from $65 on better bulb costs and ongoing momentum in the industry. The firm said even though there are fierce competitors, CREE is clearly leading the pack worldwide in the solid-state lighting revolution.

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The current short interest as a percentage of the float for Cree stands at 8.9%. That means that out of the 116.73 million shares in the tradable float, 10.49 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 608,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CREE could easily surge sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, CREE 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 two months, with shares moving higher from its low of $53.80 a share to its intraday high of $75.98 a share. During that uptrend, shares of CREE have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CREE within range of triggering a big breakout trade post-earnings.

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 level at $75.98 to its 52-week high at $76 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.57 million shares. If that breakout hits, then CREE will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $85 to $90 a share, or even $95 a share.

I would avoid CREE 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 $72 to $70 a share 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 $67.23 to its 50-day moving average of $62.71 a share.

Cabela's

Another earnings short-squeeze prospect is Cabela's (CAB), a specialty retailer of hunting, fishing, camping and outdoor merchandise, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Cabela's to report revenue of $854.07 million on earnings of 71 cents per share.

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The current short interest as a percentage of the float for Cabela's is very high at 15.6%. That means that out of the 50.70 million shares in the tradable float, 7.70 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.3%, or by about 845,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CAB could easily experience a big short-squeeze post-earnings as the bears rush to cover some of their bets.

From a technical perspective, CAB is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last two months and change, with shares moving lower from its high of $71.80 to its recent low of $60.43 a share. During that move, shares of CAB have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of CAB have now started to rebound off that $60.43 low, and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on CAB, 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 $65.16 to $67 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 674,169 shares. If that breakout hits, then CAB will set up to re-test or possibly take out its next major overhead resistance levels at $72 to its 52-week high at $72.54 a share. Any high-volume move above those levels will then give CAB a chance to tag $75 a share.

I would simply avoid CAB 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 $63 to its 200-day moving average at $61.73 a share with high volume. If we get that move, then CAB will set up to re-test or possibly take out its next major support levels at $60.43 to $58 a share.

Mellanox Technologies

My final earnings short-squeeze play is fables semiconductor player Mellanox Technologies (MLNX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Mellanox Technologies to report revenue of $107.63 million on earnings of 32 cents per share.

The current short interest as a percentage of the float for Mellanox Technologies is pretty high at 12.2%. That means that out of the 37.47 million shares in the tradable float, 3.95 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 set off a solid short-squeeze for shares of MLNX post-earnings.

From a technical perspective, MLNX is currently trending just above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last three months and change, with shares moving lower from its high of $54.89 to its recent low of $33.69 a share. During that move, shares of MLNX have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of MLNX have recently started to trend back above its 50-day at $38.72 and well off its recent low of $33.69 a share. That move has pushed shares of MLNX within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on MLNX, 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 $42.45 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 798,645 shares. If that breakout hits, then MLNX will set up to re-test or possibly take out its next major overhead resistance levels at $47 to its 200-day at $48.80 a share.

I would avoid MLNX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $38.72 a share and then below more near-term support at $37.57 a share with high volume. If we get that move, then MLNX will set up to re-test or possibly take out its next major support level at $33.69 to $30 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.