Stock Quotes in this Article: ATHN, CSTR, SNCR, LNKD, YELP

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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Coinstar

My first earnings short-squeeze play is automated retail solutions provider Coinstar (CSTR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Coinstar to report revenue of $580.19 million on earnings of 73 cents per share.

During the last quarter, Coinstar reported revenue of $537.6 million and GAAP sales were 15% higher than the prior-year quarter’s $465.6 million Non-GAAP EPS came in at $1.26 per share and GAAP EPS was $1.14, which was 3.4% lower than the prior-year quarter’s $1.18 per share.

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The current short interest as a percentage of the float for Coinstar is extremely high at 43.3%. That means that out of the 27.36 million shares in the tradable float, 12.9 million shares are sold short by the bears. This is a heavily shorted stock with a low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of CSTR post-earnings.

From a technical perspective, CSTR is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $46.83 on the downside and $54.16 on the upside. A high-volume move above the upper-end of that range post-earnings will trigger a breakout for shares of CSTR.

If you’re bullish on CSTR, then I would wait until after its report and look for long-biased trades if this stock is trending above its 50-day at $49.86 and then if it breaks out above some near-term overhead resistance at its 200-day of $53.53 a share and above more resistance levels at $54.11 to $54.16 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 912,713 shares. If that breakout triggers, then CSTR will set up to re-fill some of its previous gap down zone from last July that started above $60 a share.

I would simply avoid CSTR 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 $48.92 a share with heavy volume. If we get that move, then CSTR will set up to re-test or possibly take out its next major support levels at $46.83 to $45.19 a share. Any high-volume move below $45.19 will then put $43.07 to $41 into range for shares of CSTR.

I also featured Coinstar recently in “3 Stocks Rising on Unusual Volume.”

LinkedIn

Another potential earnings short-squeeze trade is online professional network operator LinkedIn (LNKD), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Linkedin to report revenue of $279.50 million on earnings of 19 cents per share.

This company has reported double-digit year-over-year percentage revenue growth for the last four quarters in a row. During that time frame, revenue has grown by an average of 93.8%. This stock is trending strong heading into its report, since shares are currently trading just 4 points off its 52-week high of $127.45 a share.

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The current short interest as a percentage of the float for Linkedin is notable at 8.6%. That means that out of the 86.62 million shares in the tradable float, 5.28 million shares are sold short by the bears. Any bullish earnings news could easily spark a solid short-covering rally for shares of LNKD post-earnings.

From a technical perspective, LNKD 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 three months, with shares soaring from its low of $94.75 to its recent 52-week high of $127.45 a share. During that uptrend, shares of LNKD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LNKD within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on LNKD, 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 $125 to $127.45 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.8 million shares. If that breakout triggers, then LNKD will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $135 to $150 a share.

I would simply avoid LNKD 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 $120 to $117.50 a share with high volume. If we get that move, then LNKD will set up to re-test or possibly take out its 50-day moving average of $115.11 a share. Any high-volume move below its 50-day will then put $109.80 to its 200-day at $108.82 into focus for shares of LNKD.

Athenahealth

One potential earnings short-squeeze candidate is business services provider to medical groups Athenahealth (ATHN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Athenahealth to report revenue of $116.97 million on earnings of 28 cents per share.

Just last week, Raymond James downgraded shares of Athenahealth to outperform from strong buy based on valuation. The firm did raise its price target on the stock to $95 from $85. During the last quarter, this company reported revenue of $105.9 million, and GAAP sales came in 26% higher than the prior-year quarter’s $83.7 million.

The current short interest as a percentage of the float for Athenahealth is extremely high at 21%. That means that out of the 35.58 million shares in the tradable float, 7.44 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or by about 102,000 shares. If the bears are caught leaning too hard into a strong quarter, then this stock could explode higher post-earnings.

From a technical perspective, ATHN 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 and change, with shares soaring higher from its low of $56.33 to its recent high of $90.84 a share. During that uptrend, shares of ATHN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ATHN within range of triggering a major breakout trade post-earnings.

If you’re bullish on ATHN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $90.84 to $94.46 a share with high volume. Look for volume on that move that hits registers near or above its three-month average volume of 553,973 shares. If that breakout triggers, then ATHN will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $97.37 a share. Any high-volume move above its 52-week high could then send shares of ATHN above $100 a share.

I would avoid ATHN 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 $85.72 to $82.50 a share with high volume. If we get that move, then ATHN will set up to re-test or possibly take out its 200-day moving average of $79.69 a share or its 50-day moving average of $77.54 a share.

Yelp!

Another earnings short-squeeze play is directory services and social networking website operator Yelp! (YELP), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Yelp to report revenue of $40.29 million on a loss of 4 cents per share.

The current short interest as a percentage of the float for Yelp is extremely high at 27.3%. That means that out of the 23.51 million shares in the tradable float, 4.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or by about 64,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of YELP could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, YELP is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last three months, with shares moving higher from its low of $16.32 to its recent high of $22.44 a share. During that uptrend, shares of YELP have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of YELP within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on YELP, 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 $21.67 to $22.44 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.1 million shares. If that breakout triggers, then YELP will set up to re-test or possibly take out its next major overhead resistance levels at $24.51 to $26 a share. Any high-volume move above $26 will then put $27.65 to $28 into focus for shares of YELP.

I would avoid YELP 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 $20.10 to $19.45 a share with high volume. If we get that move, then YELP will set up to re-test or possibly take out its next major support levels at $17.90 to $17.48 a share. Any high-volume move below $17.48 will then put $16.32 into range for shares of YELP.

Synchronoss Technologies

My final earnings short-squeeze trade idea is on-demand transaction management solutions provider Synchronoss Technologies (SNCR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Synchronoss Technologies to report revenue of $70.09 million on earnings of 25 cents per share.

On Jan. 16, Credit Suisse upgraded this stock to outperform from neutral, saying multiple factors set the company up to speed its revenue growth this year. The firm cited strong fourth-quarter smartphone sales at AT&T and a new $350 million multi-year contract with Verizon Wireless, beginning in the first half of this year.

The current short interest as a percentage of the float for Synchronoss Technologies is pretty high at 10.2%. That means that out of the 24.71 million shares in the tradable float, 3.02 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4%, or by about 116,000 shares.

From a technical perspective, SNCR 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 three months, with shares soaring higher from its low of $17.08 to its recent high of $24.61 a share. During that uptrend, shares of SNCR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SNCR within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on SNCR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $24.61 to $25.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 220,677 shares. If we get that breakout, then SNCR will set up to re-fill some of its previous gap down zone from last May that started at $28 a share. Any high-volume move above $28 will then put $32 to $33.21 into range for shares of SNCR.

I would simply avoid SNCR 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 $23 to $22.42 a share with high volume. If we get that move, then SCNR will set up to re-test or possibly take out its next major support level at its 50-day moving average of $21.20 a share. Any high-volume move below $21.20 will then put $20 to $19 into range for shares of SCNR.

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.