Stock Quotes in this Article: ARUN, CRM, HAIN, RUE, SCVL

WINDERMERE, Fla. (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 timeframe 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. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you 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, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

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

Hain Celestial Group

My first earnings short-squeeze play is food processing player Hain Celestial Group (HAIN), which is set to release numbers on Wednesday after the market close. This company manufactures, markets, distributes and sells natural and organic products under brand names which are sold as better-for-you products. Wall Street analysts, on average, expect Hain Celestial Group to report revenue of $365.59 million on earnings of 45 cents per share.

This company has topped Wall Street estimates during the last four quarters, and it’s coming off a quarter where it beat estimates by 4 cents, after reporting a profit of 54 cents per share vs. expectations of 50 cents per share. Hain Celestial Group has averaged year-over-year revenue growth of 27% over the last four quarters.

The current short interest as a percentage of the float for Hain Celestial Group is pretty high at 9.1%. That means that out of the 36.38 million shares in the tradable float, 3.97 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 207,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a large short squeeze develop post-earnings.

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From a technical perspective, HAIN is currently trading above both its 50-day and 200-day moving averages, which is bullish. For the last four months, shares of HAIN have been trending inside of a sideways trading pattern, with shares moving between $49.63 on the downside and $58.31 on the upside. A move outside of that sideways pattern post-earnings will likely set up the next major trend for HAIN.

If you’re bullish on HAIN, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to break out above some overhead resistance levels at $57.89 to $58.31 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 553,294 shares. If we get that breakout, then look for HAIN to trade north of $60 a share post-earnings. Keep in mind that any move above $58.31 will push HAIN into all-time high territory, which is bullish price action.

I would simply avoid HAIN or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day moving average of $54.72 a share with high volume. If we get that move, then look for HAIN to re-test and possibly take out its next significant support levels at $51.38 to $49.63 a share post-earnings. If we get a high-volume move below $49.63, then HAIN could fall to its 200-day moving average of $45.28 a share.

As of the most recently reported quarter, HAIN was one of Carl Icahn's holdings.

Aruba Networks

Another potential earnings short-squeeze trade is communications services provider Aruba Networks (ARUN), which is set to release its numbers on Thursday after the market close. This company connects local and remote users to corporate information technology resources via distributed enterprise networks. Wall Street analysts, on average, expect Aruba Networks to report revenue of $136.84 million on earnings of 17 cents per share.

This company has met or topped Wall Street estimates during the last four quarters. In the last quarter, Aruba Networks reported earnings per shares of 16 cents, which was in line with Wall Street estimates. Revenue for the last quarter came in at $131.9 million. GAAP reports sales were 25% higher than the prior-year quarter-s $105.8 million.

The current short interest as a percentage of the float for Aruba Networks is extremely high at 21.5%. That means that out of the 112.20 million shares in the tradable float, 22.50 million shares are sold short by the bears. This is a huge short interest, so if Aruba Networks can deliver the type of quarter the bulls are looking for, then this stock could skyrocket post-earnings.

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From a technical perspective, ARUN is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently broke out topside of a sideways trading pattern that saw the stock trend between $12.30 and $15.40 a share. Following that breakout, shares of ARUN have run up to its current price of around $17.40 a share. That move has now pushed ARUN within range of triggering another breakout trade post-earnings.

If you’re in the bull camp on ARUN, then I would wait until after it reports earnings and look for long-biased trades if it breaks out above some near-term overhead resistance at $17.74 a share, and if it takes out its 200-day moving average of $18.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3,405,610 shares. If we get that move, then ARUN will have a great chance of re-testing and possibly taking out its next significant overhead resistance levels at $21.70 to $22.38 a share.

I would simply avoid ARUN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out some near-term support at $16 a share with heavy volume. If we get that action, then look for ARUN to re-test and possibly take out its 50-day moving average of $14.65 a share post-earnings.

Aruba shows up on a list of 6 Top Earnings to Watch.

Rue21

Another potential earnings short-squeeze trade idea is specialty retail apparel player Rue21 (RUE), which is set to release numbers on Wednesday before the market open. This company offers a line of apparel and accessories for girls and guys, including graphic t-shirts, denim, dresses, shirts, hoodies, belts, jewelry, handbags, footwear, intimate apparel and other accessories. Wall Street analysts, on average, expect Rue21 to report revenue of $203.32 million on earnings of 34 cents per share.

If you’re looking for a strong trending heavily-shorted retail stock ahead of its quarter, then make sure to check out shares of Rue21. This stock has been on fire this year with shares up over 26%. The current short interest as a percentage of the float for Rue21 is extremely high at 22.1%. That means that out of the 16.14 million shares in the tradable float, 3.57 million shares are sold short by the bears.

From a technical perspective, RUE is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double bottom chart pattern at around $23.85 to $23.97 a share. Following that bottom, shares of RUE have soared back above both its 50-day and 200-day moving averages to hit its current price of around $27.50 a share. That move has now pushed RUE within range of triggering a breakout trade post-earnings.

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If you’re bullish on RUE, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $28.07 to $29.74 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 275,444 shares. If we get that move, then look for RUE to re-test and possibly take out its next major overhead resistance level at $31.97 a share. Any high-volume move above $31.97 will put $34 a share into focus for RUE after earnings.

I would avoid RUE or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves below both its 50-day at $25.91 and its 200-day at $26 a share with heavy volume. If we get that action, then RUE will setup to re-test and possibly take out its next significant support level at $23.85 a share post-earnings.

Shoe Carnival

Another potential earnings short-squeeze trade is family footwear retailer Shoe Carnival (SCVL), which is set to release numbers on Thursday after the market close. This company offers customers an assortment of dress, casual and athletic footwear for men, women and children with emphasis on national and regional name brands. Wall Street analysts, on average, expect Shoe Carnival to report revenue of $182.12 million on earnings of 11 cents per share.

If you’re looking for a strong trending retail player with a decent short interest ahead of its quarter, then make sure to take a hard look at shares of Shoe Carnival. This stock has been in hot demand so far in 2012, with shares up a whopping 36%. As we approach Shoe Carnival’s earnings report, this stock is treading within a stone’s throw of its 52-week high of $23.58 a share.

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The current short interest as a percentage of the float for Shoe Carnival is notable at 3.3%. That means that out of the 14.23 million shares in the tradable float, 464,600 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 if Shoe Carnival can deliver the earnings news the bulls are looking for.

From a technical perspective, SCVL is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the past five months, with shares soaring from $18.59 to its 52-week high of $23.59 a share. During that monster move higher, shares of SCVL have been mostly making higher lows and higher highs, which is bullish technical price action.

If you’re in the bull camp on SCVL, then I would wait until after it reports earnings and look for long-biased trades if this stock manages to print a new 52-week high above $23.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 73,152 shares. If SCVL moves into new 52-week high territory, then this stock will have a great a chance of trading north of $25 a share post-earnings.

I would simply avoid SCVL or look for short-biased trades if after earnings the stock fails to hit a new 52-week high, and then moves back below its 50-day moving average of $21.86 a share with high volume. If we get that move, then look for SCVL to re-test and possibly take out its next major support zones at $21.11 to $20.80 a share post-earnings. Any high-volume move below those levels should setup SCVL to head towards its 200-day moving average of $19.03 a share.

Salesforce.com

My final earnings short-squeeze trade idea today is software player Salesforce.com (CRM), which is set to release numbers on Thursday after the market close. This company is a provider of enterprise cloud computing and social enterprise solutions. Wall Street analysts, on average, expect Salesforce.com to report revenues of $728.25 million on earnings of 39 cents per share.

Just this morning, JMP Securities said its checks during the quarter on Salesforce.com are positive ahead of the company’s earnings report. Oppenheimer has also commented on the stock today, saying they recommend buying Salesforce.com ahead of next month’s Dreamforce conference. The firm expects the company to report favorable second quarter results, and it maintains an outperform rating.

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This company missed Wall Street estimates last quarter after beating expectations in the prior two quarters. This company has averaged year-over-year revenue growth of 37.7% over the last four quarters. The current short interest as a percentage of the float for Salesforce.com is rather high at 10.4%. That means that out of the 126.50 million shares in the tradable float, 13.20 million are sold short by the bears.

From a technical perspective, CRM is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock broke out in August above both of those key moving averages and above some near-term overhead resistance at $133.39 a share. Following that breakout, shares of CRM have surged to its current price of around $149.80 a share. That move has now pushed CRM within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on CRM, then I would wait until after it reports earnings and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $151.91 a share, or Thursday’s intraday high (whichever is greater) with high volume. Look for volume on that move that registers near or above its three-month average volume of 2,471,350 shares. If we get that action, then look for CRM to re-test and possibly take out its next major overhead resistance levels at $163.50 to $164.75 a share post-earnings.

I would simply avoid CRM or look for short-biased trades after earnings if it fails to trigger that breakout, and then moves back below some near-term support at $142.50 a share with heavy volume. If we get that move, then CRM will setup to re-test and possibly take out both its 50-day at $134.34 and its 200-day at $132.86 a share post-earnings. Any high-volume move below both of those key moving averages will setup CRM to trade below $130 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 Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.