Stock Quotes in this Article: LGND, STMP, Z, GNC, TRIP

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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TripAdvisor

My first earnings short-squeeze trade idea is online travel player TripAdvisor (TRIP), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect TripAdvisor to report revenue of $167.05 million on earnings of 27 cents per share.

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Just recently, a Piper Jaffray analyst said TripAdvisor is well-positioned for multiyear growth in online travel and spending. The analyst said the company will continue to be able to capture share from other travel ad channels and that its proprietary content, such as user-generated reviews, will continue to be a differentiator for the site.

The current short interest as a percentage of the float for TripAdvisor is pretty high at 10.2%. That means that out of the 98.75 million shares in the tradable float, 12.16 million shares are sold short by the bears. If TripAdvisor can deliver a strong quarter and bullish guidance, then this stock has a solid chance of seeing a large short-squeeze post-earnings.

From a technical perspective, TRIP 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 $28.63 to its recent high of $49.35 a share. During that uptrend, shares of TRIP have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TRIP within range of triggering a major breakout trade post-earnings.

If you’re bullish on TRIP, 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 at $49.35 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.2 million shares. If that breakout hits, then TRIP will set up to enter new 52-week high territory, which is bullish price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would simply avoid TRIP 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 $43.40 a share with heavy volume. If we get that move, then TRIP will set up to re-test or possibly take out its next major support levels at $42.77 to $41.48 a share. Any high-volume move below $41.48 will then put its 200-day moving average of $39.33 into range for shares of TRIP.

Stamps.com

Another potential earnings short-squeeze play is Internet-based postage solutions provider Stamps.com (STMP), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Stamps.com to report revenue of $31.37 million on earnings of 44 cents per share.

During the last quarter, this company reported revenue of $29.1 million and GAAP reported sales were 17% higher than the prior-year quarter’s $24.9 million. Last quarter, non-GAAP EPS was 50 cents per share and GAAP EPS was 42 cents per share, which was 40% higher than the prior-year quarter’s 30 cents per share.

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The current short interest as a percentage of the float for Stamps.com is notable at 5.1%. That means that out of the 14.18 million shares in the tradable float, 827,000 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 Stamps.com gives the bulls what they’re looking for.

From a technical perspective, STMP is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways in a consolidation pattern for the last month, with shares moving between $25.73 on the downside and $28 on the upside. A high-volume move above the upper-end of that range post-earnings will trigger a breakout trade for shares of STMP.

If you’re in the bull camp on STMP, 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 $28 to $28.49 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 153,352 shares. If that breakout triggers, then STMP will set up to re-test or possibly take out its next major overhead resistance levels at $32.49 to $33.29 a share.

I would simply avoid STMP 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 $26.11 a share with high volume. If we get that move, then STMP will set up to re-test or possibly take out its 200-day moving average at $24.27 a share. Any high-volume move below that level could send STMP towards $23.50 a share or lower.

Zillow

Another potential earnings short-squeeze candidate is online real estate information provider Zillow (Z), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zillow to report revenue of $31.47 million on earnings of 0 cents per share.

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If you’re looking for a heavily shorted stock that’s trending strong heading into its quarterly report, then make sure to check out shares of Zillow. This stock is up 48% during the last three months, and it's currently trading about 10 points off its 52-week high of $46.86 a share.

The current short interest as a percentage of the float for Zillow is extremely high at 40.6%. That means that out of the 18.72 million shares in the tradable float, 8.33 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then this stock could easily explode higher post-earnings.

From a technical perspective, Z 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 $23 to its recent high of $38.17 a share. During that uptrend, shares of Z have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Z within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on Z, 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 $38.17 to $38.41 a share and then once it clears more resistance at $39.20 to $39.42 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 647,810 shares. If that breakout triggers, then Z will set up to re-test or possibly take out its next major overhead resistance levels at $42.82 to $46.86 a share.

I would avoid Z or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average at $35.63 a share and below $34.51 a share with high volume. If we get that move, then Z will set up to re-test or possibly take out its 50-day moving average at $31.33 a share.

Ligand Pharmaceuticals

Another earnings short-squeeze play is biotechnology and drugs player Ligand Pharmaceuticals (LGND), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Ligand Pharmaceuticals to report revenue of $13.27 million on earnings of 21 cents per share.

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If you’re looking for a stock with a decent short interest that’s trending strong heading into its earnings report, then make sure to take a hard look at shares of Ligand Pharmaceuticals. This stock has traded up 25% during the last three months, and it's currently trading just 2 points off its 52-week high of $21.75 a share.

The current short interest as a percentage of the float for Ligand Pharmaceuticals is notable at 7.4%. That means that out of the 12.49 million shares in the tradable float, 1.46 million shares are sold short by the bears. Any bullish earnings news could easily spark short-squeeze for shares of LGND post-earnings.

From a technical perspective, LGND is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last month and change, with shares moving between $18.42 on the downside and 21.75 on the upside. A high-volume move above the upper-end of its recent range will triggering a breakout trade for shares of LGND post-earnings.

If you’re bullish on LGND, 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 $20.98 to $20.99 a share and then once it clears more resistance at $21.75 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 150,774 shares. If that breakout triggers, then LGND will set up to enter new 52-week high territory above $21.75 a share, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $28 a share.

I would avoid LGND 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 $20.08 a share with high volume. If we get that move, then LGND will set up to re-test or possibly take out its next major support levels at $19.35 to $19.03 a share. Any high-volume move below those levels will then put $18.42 to $17.69 into range for shares of LGND.

GNC

My final earnings short-squeeze trade idea is specialty retailer of nutritional supplements GNC (GNC), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect GNC to report revenue of $574.72 million on earnings of 46 cents per share.

During the last quarter, this company reported revenue of $621.6 million and GAAP reported sales were 16% higher than the prior-year quarter’s $538 million. Last quarter, non-GAAP EPS was 61 cents per share and GAAP EPS was 60 cents per share, which was 33% higher than the prior-year quarter’s 45 cents per share.

The current short interest as a percentage of the float for GNC sits at 8.9%. That means that out of the 98.83 million shares in the tradable float, 9.1 million shares are sold short by the bears. This isn’t a huge short interest, but its more than enough to send shares of GNC soaring higher post-earnings if the company can deliver the numbers the bulls are looking for.

From a technical perspective, GNC is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently spiked back above its 50-day moving average with strong upside volume flows. That move has started to push shares of GNC within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on GNC, 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 $36.95 to $37.26 a share and then once it takes out more resistance at $37.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.8 million shares. If that breakout triggers, then GNC will set up to re-test or possibly take out its next major overhead resistance levels at $41.22 to $42.70 a share. Any high-volume move above $42.70 a share would then push GNC into new 52-week high territory, which is bullish price action.

I would simply avoid GNC 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 $34.66 a share with high volume. If we get that move, then GNC will set up to re-test or possibly take out its next major support levels at $32.94 to $30.92 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.