Stock Quotes in this Article: BMRN, INCY, MRGE, OMPI, TTWO

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.

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.

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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.

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.

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

Take-Two Interactive

My first earnings short-squeeze play today is video game maker Take-Two Interactive (TTWO), which is set to report results on Tuesday after the market close. This company is a developer, marketer and publisher of interactive entertainment for consumers worldwide. Wall Street analysts, on average, expect Take-Two Interactive to report revenue of $254.18 million on a loss of 65 cents per share.

During the last quarter, this company missed estimates by 12 cents per share, reporting a loss of 72 cents per share vs. Wall Street estimates of a net loss of 60 cents per share. For the third quarter of the last fiscal year, Take-Two Interactive beat Wall Street estimates by 1 cent.

The current short interest as a percentage of the float for Take-Two Interactive is very high at 14.5%. That means that out of the 76.44 million shares in the tradable float, 12.78 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news out of Take-Two Interactive, and we could see a large short-squeeze develop post-earnings.

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From a technical perspective, TTWO is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been stuck in a nasty downtrend for the last six months, with shares plunging from a high of $16.23 to a recent low of $8.69 a share. During that massive slide lower, shares of TTWO have been consistently making lower highs and lower lows, which is bearish technical price action.

If you’re bullish on TTWO, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to take out its 50-day moving average of $10.07 a share, and some more overhead resistance at $10.35 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.1 million shares. If we get that move, then TTWO could spike toward $11.81 to $12.27 a share or possibly even near its 200-day moving average of $13.53 a share.

I would simply avoid TTWO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major near-term support at $8.69 a share with high volume. If we get that action, then TTWO will enter new 52-week-low territory, which is very bearish price action. Some targets to the downside would be $8 to $7 a share if the bears hammer this stock post-earnings.

Take Two shows up on a recent list of 5 Oversold Stocks Ready for a Bounce Higher.

Merge Healthcare

Another potential earnings short-squeeze play is technology player Merge Healthcare (MRGE), which is set to release its numbers on Wednesday before the market open. This company develops software solutions that facilitate the sharing of images to create an electronic healthcare experience for patients and physicians. Wall Street analysts, on average, expect Merge Healthcare to report revenue of $60.60 million on earnings of 1 cent per share.

If you’re looking for a beaten-down and heavily-shorted small-cap stock ahead of its earnings report this week, then make sure to check out shares of Merge Healthcare. This stock has been annihilated by the sellers, with shares off by over 35% so far in 2012, and down over 42% in the last six months.

The current short interest as a percentage of the float for Merge Healthcare is rather high at 11.1%. That means that out of the 58.06 million shares in the tradable float, 6.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by about 276,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sharp short-covering rally develop post-earnings.

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From a technical perspective, MRGE is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been hammered by the bears during the last six months, with shares dropping from over $6.50 to a recent low of $2.20 a share. During that large move lower, shares of MRGE have been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to find support near its 50-day and its now setting up for a breakout trade post-earnings.

If you’re in the bull camp on MRGE, then I would wait until after it reports earnings and look for long-biased trades if this stock breaks out above some near-term overhead resistance at $3.11 to $3.37 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 804,784 shares. If we get that move, then MRGE will have a great chance of hitting $4 to $4.70 a share post-earnings.

I would simply avoid MRGE or look for short-biased trades if after earnings this stock fails to trigger that breakout and then takes out its 50-day moving average of $2.69 a share with heavy volume. If we get that action, then MRGE will setup to trade back towards some major near-term support zones at $2.30 to $2.20 a share.

Obagi Medical Products

One possible earnings short-squeeze trade in the biotechnology and drugs complex is Obagi Medical Products (OMPI), which is set to release numbers on Thursday after the market close. This company develops, markets and sells, and is a provider of, topical aesthetic and therapeutic prescription-strength skin care systems and related products in the physician-dispensed market. Wall Street analysts, on average, expect Obagi Medical Products to report revenue of $30.39 million on earnings of 14 cents per share.

The current short interest as a percentage of the float for Obagi Medical Products is notable at 10.4%. That means that out of the 17.66 million shares in the tradable float, 1.89 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 111%, or by about 993,000 shares. That is a huge increase on a stock with an extremely low float. If Obagi Medical Products can deliver a strong quarter, then this stock will have an excellent chance of seeing a giant short-squeeze.

From a technical perspective, OMPI 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 six months, with shares soaring from a low of $11.07 to a recent high of $18 a share. During that monster run higher, shares of OMPI have been consistently making higher lows and higher highs, which is bullish technical price action. That said, the stock recently pulled back off that $18 high to right near its 50-day moving average of $14.55 a share.

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If you’re bullish on OMPI, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to hold its trend above its 50-day moving average of $14.55 a share with strong upside volume flows. I would consider any upside volume day that registers near or above its three-month average action of 379,127 shares as bullish. If that trend for OMPI holds post-earnings, then this stock has a great chance of re-testing and possibly taking out its 52-week high of $18 a share.

I would avoid OMPI or look for short-biased trades if it fails to hold that trend after it reports, and it then takes out its 50-day at $14.55 with heavy volume. If we see that action, then OMPI could easily trade down toward $13.50 to $12 a share if the bears whack this lower post-earnings.

BioMarin Pharmaceuticals

One potential earnings short-squeeze play in the biotechnology and drugs complex is BioMarin Pharmaceuticals (BMRN), which is set to release numbers on Wednesday after the market close. This company develops and commercializes pharmaceuticals for serious diseases and medical conditions. Wall Street analysts, on average, expect BioMarin Pharmaceuticals to report revenue of $121.72 million on a loss of 21 cents per share.

A few weeks ago, Piper Jaffray’s Ian Somaiya reiterated his overweight rating and raised his price target for BioMarin Pharmaceuticals to $52 a share, following the addition of company’s BMN-701 to his model ahead of a “data-rich” second half of 2012. Somaiya sees the Phase III GALNS trial offering multiple opportunities for success.

The current short interest as a percentage of the float for BioMarin Pharmaceuticals is rather high at 9.6%. That means that out of the 115.16 million shares in the tradable float, 11.71 million shares are sold short by the bears.

From a technical perspective, BMRN 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 last four months, with shares soaring from a low of $31.91 to a recent high of $44.18 a share. Since tagging that high at $44.18, shares of BMRN have pulled back and bounced modestly off its 50-day moving average of $38.77 a share.

If you’re in the bull camp on BMRN, then I would wait until after it reports and look for long-biased trades if the stock holds its trend above its 50-day, and then takes out some near-term overhead resistance at $41 a share with high volume. Look for volume on that move that clocks in close to or above its three-month average action of 1.7 million shares. If we get that action, then I fully expect BMRN to re-test and possibly take out its 52-week high of $44.18 a share post-earnings.

I would simply avoid BMRN or look for short-biased trades if after earnings the stock fails to trigger that breakout, and then moves back below its 50-day moving average of $35.58 a share with high volume. If we get that action, then look for the bears to hammer BMRN down towards its 200-day moving average of $35.58 a share, or possibly even lower toward $34 to $33 a share.

Incyte

My final earnings short-squeeze trade idea today is biotechnology and drugs player Incyte (INCY), which is set to release numbers on Thursday before the market open. This company is focused on the discovery, development and commercialization of small molecule drugs to treat serious unmet medical needs. Wall Street analysts, on average, expect Incyte to report revenue of $84.56 million on earnings of zero cents per share.

If you’re looking for an extremely strong trending heavily-shorted biotech stock ahead of its earnings report this week, then make sure to take a close look at shares of Incyte. This stock has been skyrocketing so far in 2012 with shares up around 70%, and this stock is currently trading just one point off its 52-week high of $26.30 a share.

The current short interest as a percentage of the float for Incyte is pretty high at 12.7%. That means that out of the 128.10 million shares in the tradable float, 15.91 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.6%, or by about 1.25 million shares. If the bears are caught pressing their bets too hard ahead of this quarter, then we could easily see a large short squeeze post-earnings.

From a technical perspective, INCY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending like a beast for the last six months, with shares soaring from a low of $16.32 to a recent high of $26.30 a share. During that uptrend, shares of INCY have consistently made higher lows and higher highs, which is bullish technical price action. That move has now quickly pushed INCY within range of triggering a breakout trade post-earnings.
If you’re bullish on INCY, 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 $25.89 to $25.97 a share, and then its 52-week high of $26.30 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.6 million shares. If we get that action, then I would look for INCY to easily trade north of $30 a share post-earnings.

I would simply avoid INCY or look for short-biased trades if it fails to trigger that breakout after its earnings report, and it then takes out some near-term support at $25 a share with heavy volume. If we get that move, then INCY will setup to re-test and possibly take out its 50-day moving average of $23.55 a share if the bears spark a decent selloff post-earnings.

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.