Stock Quotes in this Article: BRLI, DECK, DWA, MAKO, SHLD

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 time frame 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 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.

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Deckers Outdoor

My first earnings short-squeeze trade is footwear producer, marketer and brand manager Deckers Outdoor (DECK), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Deckers Outdoor to report revenue of $623.02 million on earnings of $2.61 per share.

Last quarter, Deckers Outdoor reported revenue of $376.4 million, and GAAP reported sales were 9.2% lower than the prior-year quarter’s $414.4 million. Decker’s EPS was $1.18, and GAAP EPS was 26% lower than the prior-year quarter’s $1.59 per share.

The current short interest as a percentage of the float for Deckers Outdoor is extremely high at 39.9%. That means that out of the 33.54 million shares in the tradable float, 13.4 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. Any bullish earnings news could setup DECK for a monster short-squeeze post-earnings.

From a technical perspective, DECK is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has pulled back recently from its high of $45.20 to its low of $40.15 a share. So far off that pullback, shares of DECK have held above its 50-day moving average of $39.50 a share. Despite this pullback, shares of DECK are still trending within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on DECK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $42.39 a share and then once it takes out some near-term overhead resistance at $45.20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.33 million shares. If that breakout hits, then DECK will set up to re-test or possibly take out its next major overhead resistance levels at $49.61 to $51.65 a share. Any high-volume move above those levels will then put $55 into range for shares of DECK.

I would simply avoid DECK 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 $39.49 a share and then below more support levels at $39.04 to $38 a share with high volume. If we get that move, then DECK will set up to re-test or possibly take out its next major support levels at $36.46 to $35.70 a share.

Mako Surgical

Another potential earnings short-squeeze play is medical device player Mako Surgical (MAKO), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Mako Surgical to report revenue of $30.80 million on a loss of 11 cents per share.

If you’re looking for a heavily shorted stock that’s been beaten down by the bears ahead of its earnings report this week, then check out shares of Mako Surgical. This stock has been slammed by the sellers during the last six months, with shares off by 24.4%. That selloff currently has shares of MAKO trading just 80 cents off its 52-week low of $10.35 a share.

The current short interest as a percentage of the float for MAKO Surgical is extremely high at 29.5%. That means that out of the 40.31 million shares in the tradable float, 11.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.3%, or by about 708,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of MAKO could rip meaningfully higher post-earnings.

From a technical perspective, MAKO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last six months, with shares dropping from over $19 to its recent low of $10.35 a share. During that downtrend, shares of MAKO have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of MAKO have now started to rebound off that $10.35 low and are quickly moving within range of triggering a near-term breakout trade.

If you’re in the bull camp on MAKO, 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 $11.81 a share and then once it clears more near-term overhead resistance levels at $12.54 to $13.28 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.15 million shares. If that breakout triggers, then MAKO will set up to re-test or possibly take out its next major overhead resistance levels at $15 to $16.28 a share.

I would simply avoid MAKO 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 $10.95 to $10.35 a share with high volume. If we get that move, then MAKO will set up to enter new 52-week low territory below $10.35 a share, which is bearish price action. Some possible downside targets off that move are $9.28 to $8 a share.

Sears

One potential earnings short-squeeze candidate is specialty retail store operator Sears (SHLD), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Sears to report revenue of $11.77 billion on earnings of 98 cents per share.

If you’re looking for a heavily-shorted stock that’s been uptrending decent heading into its earnings report this week, then make sure to take a hard look at shares of Sears. This stock has been trending higher in 2013, with shares up 9.2% so far.

The current short interest as a percentage of the float for Sears is pretty high at 10.9%. That means that out of the 41.83 million shares in the tradable float, 8.55 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then shares of SHLD could easily get squeezed higher post-earnings.

From a technical perspective, SHLD is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $38.40 to its recent high of $49.18 a share. During that uptrend, shares of SHLD have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SHLD within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on SHLD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average at $49.06 a share and then once it takes out more overhead resistance at $49.18 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.14 million shares. If that breakout hits, then SHLD will set up to re-test or possibly take out its next major overhead resistance level at $55 to $60 a share.

I would avoid SHLD 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 $44.72 a share with high volume. If we get that move, then SHLD will set up to re-test or possibly take out its next major support levels at $42.50 to $40 a share. Any high-volume move below $40 will then put its 52-week low of $38.40 into range for shares of SHLD.

DreamWorks Animation

Another earnings short-squeeze prospect is motion pictures maker DreamWorks Animation (DWA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect DreamWorks Animation to report revenue of $216.04 million on a loss of 6 cents per share.

During the last quarter, DreamWorks Animation reported revenue of $186.3 million, and GAAP reported sales were 16% higher than the prior-year quarter’s $160.8 million. The company reported EPS of 29 cents per share, and GAAP EPS of 29 cents per share was 26% higher than the prior-year quarter’s 23 cents per share.

The current short interest as a percentage of the float for DreamWorks Animation is extremely high at 26.6%. That means that out of the 65.90 million shares in the tradable float, 17.37 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.9%, or by about 326,000 shares. If the shorts are caught leaning too strong into a bullish quarter, then shares of DWA could explode higher post-earnings.

From a technical perspective, DWA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last three months, with shares moving between $15.90 on the downside and $18.32 on the upside. A high-volume move above the upper-end of its recent sideways chart pattern could trigger a breakout trade for shares of DWA post-earnings.

If you’re bullish on DWA, 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 $17.69 to $18.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.02 million shares. If that breakout triggers, then DWA will set up to re-test or possibly take out its next major overhead resistance levels at $19.82 to $22.98 a share.

I would avoid DWA 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 and its 52-week low of $15.90 a share with high volume. If we get that move, then DWA 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.

Bio-Reference Laboratories

My final earnings short-squeeze trade idea is laboratory testing services player Bio-Reference Laboratories (BRLI), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Bio-Reference Laboratories to report revenue of $168.42 million on earnings of 28 cents per share.

If you’re looking for a heavily-shorted stock that’s been beaten-down notably heading into its earnings report this week, then make sure to check out shares of Bio-Reference Laboratories. This stock has been moving lower in 2013, with shares off by 10.9% so far.

The current short interest as a percentage of the float for Bio-Reference Laboratories is very high at 39.9%. That means that out of the 27.71 million shares in the tradable float, 9.53 million shares are sold short by the bears. If the bulls get the news they’re looking for, then BRLI could easily rip higher post-earnings, since the float here is small and the short interest is huge.

From a technical perspective, BRLI is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month and change, with shares falling from its high of $31.15 to its intraday low of $24.35 a share. During that downtrend, shares of BRLI have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of BRLI have now entered extremely oversold territory, since its current relative strength index reading is 34.57. Oversold can always get more oversold, but it’s also an area where a stock can experience a powerful bounce higher from.

If you’re in the bull camp on BRLI, 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 at $26.92 a share and its 200-day at $28.27 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 309.600 shares. If that breakout triggers, then BRLI will set up to re-test or possibly take out its next major overhead resistance levels at $30 to $31.51 a share. Any high-volume move above those levels will then put $32 to $32.86 into range for shares of BRLI.

I would simply avoid BRLI 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 $23.66 a share with high volume. If we get that move, then BRLI will set up to re-test or possibly take out its next major support levels at $22 to $20 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 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.