Stock Quotes in this Article: AFFY, EZCH, FSYS, FTK, SODA

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.


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 -- buy only if you have a very strong conviction that the stock is going to rip higher, and it's 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.

>>Also: 8 Stocks Soaring With Unusual Volume


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.

SODA ChartSODA data by YCharts
SodaStream International


My first earnings short-squeeze play is soda machine maker SodaStream International SODA, which is set to release numbers on Wednesday before the market open. This company, along with its subsidiaries, is engaged in developing, manufacturing and marketing home beverage carbonation systems and related products. Wall Street analysts, on average, expect SodaStream International to report revenues of $90.64 million on earnings of 48 cents per share.


If you're looking for a strong uptrending heavily shorted stock heading into its earnings report this week, then make sure to check out shares of SodaStream International. This stock has been on fire during the last three months, with shares up a whopping 39%. The current short interest as a percentage of the float for SodaStream International is extremely high at 55.2%. That means that out of the 16.99 million shares in the tradable float, 9.85 million shares are sold short by the bears.


From a technical perspective, SODA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a double-bottom chart pattern back in May at around $29.82 to $29.44 a share. After hitting that bottom, shares of SODA have soared to its recent high of $43.70 a share. During that uptrend, shares of SODA have mostly made higher lows and higher highs, which is bullish technical price action. That move has now pushed SODA within range of triggering a near-term breakout trade.


If you're bullish on SODA, then I would wait until after they report earnings and look for long-biased trades, if this stock can manage to take out some overhead resistance at $44 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1,041,170 shares. If we get that move, then SODA will have a great chance to re-test and possibly take out its next major overhead resistance level at $48.13 a share.


I would simply avoid SODA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $40 a share with high volume. If we get that move, then look for SODA to re-test and possibly take out either its 50-day at $37.53 or its 200-day at $35.77 a share.

EZCH ChartEZCH data by YCharts
EZchip Semiconductor


Another possible earnings short-squeeze play is semiconductor player EZchip Semiconductor EZCH, which is set to release its numbers on Wednesday before the market open. This is a fabless semiconductor company that is engaged in the development and marketing of Ethernet network processors for networking equipment. Wall Street analysts, on average, expect EZchip Semiconductor to report revenues of $15.51 million on earnings of 26 cents per share.


Another strong trending heavily shorted stock heading into its earnings report this week is EZchip Semiconductor. This stock has skyrocketed so far in 2012 with shares up over 40%, and it's currently trading just seven points off its 52-week high of $46.79 a share.


The current short interest as a percentage of the float for EZchip Semiconductor is rather high at 11.1%. That means that out of the 26.80 million shares in the tradable float, 3.09 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.9%, or by about 279,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a monster short-squeeze develop post-earnings.


From a technical perspective, EZCH is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock tagged a near-term low in July at $31.30 a share, and then subsequently soared back above both its 50-day and 200-day moving averages. That move has now pushed EZCH within range to trigger a near-term breakout trade post-earnings.


If you're in the bull camp on EZCH, then I would wait until after they report earnings and look for long-biased trades, if this stock breaks out above some near-term overhead resistance at $40.25 to $40.34 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 335,784 shares. If we get that move, then EZCH will have a great chance of re-testing and possibly taking out its next major overhead resistance levels at $43.34 to $45 a share.


I would simply avoid EZCH or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out Tuesday's low of $38.33 a share with heavy volume. If we get that action, then EZCH will setup to re-test and possibly take out both its 50-day at $36.67 and its 200-day at $36.47 a share post-earnings.

FSYS ChartFSYS data by YCharts
Fuel Systems Solutions


One potential earnings short-squeeze trade in the alternative energy complex is Fuel Systems Solutions FSYS , which is set to release numbers on Wednesday before the market open. This company engages in the design, manufacture, and supply of alternative fuel components and systems for use in the transportation, industrial and power generation markets worldwide. Wall Street analysts, on average, expect Fuel Systems Solutions to report revenues of $105.09 million on earnings of 10 cents per share.


The current short interest as a percentage of the float for Fuel Systems Solutions is pretty high at 13.4%. That means that out of the 14.20 million shares in the tradable float, 1.91 million shares are sold short by the bears. This is a low-float high-short interest stock, so if the bulls get the earnings numbers they're looking for, this stock could explode post-earnings.


From a technical perspective, FSYS is currently trading above its 50-day moving average and just below its 200-day moving average, which is neutral trend wise. This stock has been trending inside of a large sideways trading pattern for the last two months, with shares bouncing between $14.02 and $18.55 a share. During that sideways trade, shares of FSYS have been making higher lows and higher highs, with the stock taking out the upper-end of the range today. That move is pushing FSYS close to triggering a near-term breakout trade post-earnings.


If you're bullish on FSYS, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to take out its 200-day moving average of $19.83 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 295,781 shares. If we get that breakout, then look for FSYS to possibly re-test or take out its next major overheard resistance levels at $24.16 to $24.63 a share post-earnings.


I would avoid FSYS or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves below Tuesday's low of $18.50 a share with heavy volume. If we get that action, then look for FSYS to possibly re-test or take out its 50-day moving average of $16.14 a share post-earnings.

FTK ChartFTK data by YCharts
Flotek Industries


One potential earnings short-squeeze trade in the oil well services and equipment complex is Flotek Industries FTK, which is set to release numbers on Wednesday after the market close. This is a diversified global supplier of drilling and production-related products and services. Wall Street analysts, on average, expect Flotek Industries to report revenues of $77.83 million on earnings of 20 cents per share.


This company has beaten Wall Street estimates for the last three quarters in a row. During the first quarter, revenue jumped 49.7% to $79.2 million versus $52.9 million for the same quarter last year. Flotek Industries has averaged year-over-year revenue growth of 68.7% over the last four quarters.


The current short interest as a percentage of the float for Flotek Industries is very high at 17.4%. That means that out of the 40.13 million shares in the tradable float, 8.06 million shares are sold short by the bears. This is a low float stock with a very high short interest. If the bulls get the news they're look for, then FTK could easily see a sharp short-covering rally post-earnings.


From a technical perspective, FTK is currently trading above its 50-day moving average and just below its 200-day moving average, which is neutral trend wise. This stock was smoked by the bears off its May high of $14.73 to its recent low of $8.46 a share. During that sharp move lower, shares of FTK have consistently made lower high and lower lows, which is bearish technical price action. That said, the stock has started to rebound off $8.46 to its current price near $10.30 a share. That move has pushed FTK within range of triggering a near-term breakout trade post-earnings.


If you're in the bull camp on FTK, then I would wait until after they report and look for long-biased trades if the stock manages to trigger a breakout trade above some near-term overhead resistance levels at $10.52 to $10.65 a share with high volume. Look for volume on that move that clocks in close to or above its three-month average action of 995,241 shares. If we get that move, then look for FTK to re-test and possibly take out its next major overhead resistance levels at $11.24 to $11.48 a share post-earnings.


I would simply avoid FTK 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 $9.79 a share with high volume. If we get that move, then look for FTK to possibly re-test or take out its June low of $8.46 a share post-earnings.

AFFY ChartAFFY data by YCharts
Affymax


My final earnings short-squeeze trade idea is biotechnology and drugs player Affymax
AFFY, which is set to release numbers on Wednesday after the market close. This company is engaged in developing drugs to improve the treatment of serious and often life-threatening conditions. Its product candidate, peginesatide, is for the treatment of anemia in chronic kidney disease patients on dialysis. Wall Street analysts, on average, expect Affymax to report revenues of $11.30 million on a loss of 69 cents per share.


Just recently, partner Fresenius stated that it intends to dose more patients than predicted with Affymax's Omontys. Rodman & Renshaw said they think Affymax could exceed the firm's third-quarter and fourth-quarter estimates. The firm sees this news as a positive for Affymax, and it kept an outperform rating on the stock.


The current short interest as a percentage of the float for Affymax is very high at 17.8%. That means that out of the 30.81 million shares in the tradable float, 6.28 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.9%, or by about 511,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a large short-squeeze develop post-earnings.


From a technical perspective, AFFY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently exploded back above its 50-day moving average in July on massive upside volume. Following that move, the stock has started to move within a tight range between $17.38 and $15.40 a share. A move outside of that range post-earnings will likely setup the next major trend for AFFY.


If you're bullish on AFFY, then I would wait until after they report earnings and look for long-biased trades, if it can manage to trigger a break out above some near-term overhead resistance at $16.98 to $17.33 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1,021,410 shares. If we get that action, then look for AFFY to hit or trade north of $20 a share post-earnings.


I would simply avoid AFFY or look for short-biased trades after earnings if it fails to trigger that breakout, and then takes out some near-term support at $15.40 a share with heavy volume. If we get that move, then AFFY will setup to re-test and possibly take out its 50-day moving average of $14.39 a share post-earnings.


To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.