Stock Quotes in this Article: NEON, TFM, VNET, BIOL, HCI

DELAFIELD, Wis. (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.

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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 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.


My first earnings short-squeeze play is technology retailer Neonode (NEON), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Neonode to report revenue of $2 million on a loss of 8 cents per share.

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The current short interest as a percentage of the float for Neonode is extremely high at 27.8%. That means that out of the 30.97 million shares in the tradable float, 8.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.1%, or by about 179,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of NEON could easily rip sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, NEON 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 month, with shares moving higher from its low of $5.50 to its recent high of $7.70 a share. During that move, shares of NEON have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of NEON within range of triggering a major breakout trade post-earnings.

If you're bullish on NEON, 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 $7.70 to $7.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 604,673 shares. If that breakout gets underway after earnings, then NEON will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $8.84 a share. Any high-volume move above that level will then give NEON a chance to tag $10

I would simply avoid NEON 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 $6.83 a share with high volume. If we get that move, then NEON will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $6.32 a share to its 200-day moving average of $6.26 a share.

HCI Group

Another potential earnings short-squeeze idea is property and casualty insurance player HCI Group (HCI), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect HCI Group to report revenue $68.30 million on earnings of $1.45 per share.

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Just recently, JMP Securities upgraded shares of HCI Group to outperform from market perform following recent management meetings that highlighted long term growth opportunities. The firm believes the market is underestimating HCI's new flood insurance product and believes it is a significant first mover advantage. The firm slapped a price target on shares of HCI of $48 per share.

The current short interest as a percentage of the float for HCI Group is extremely high at 23.2%. That means that out of the 9.62 million shares in the tradable float, 2.23 million shares are sold short by the bears. This is a very low float with a large short interest. If the bulls get the earnings news they're looking for, then shares of HCI could easily explode higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, HCI 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 month, with shares moving higher from its low of $39.31 to its intraday high of $49.89 a share. During that uptrend, shares of HCI have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of HCI within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on HCI, then I would wait until after its report and look for long-biased trades if this stock manages to take out some near-term overhead resistance levels at $52.12 a share to its 52-week high at $53.28 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 197,105 shares. If that breakout kicks off after earnings, then HCI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.

I would simply avoid HCI 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 its 50-day moving average of $47.26 a share to some more major near-term support at $46.22 a share with high volume. If we get that move, then HCI will set up to re-test or possibly take out its next major support levels at $41.25 a share to its 200-day moving average of $40.01 a share.

21Vianet Group

Another potential earnings short-squeeze candidate is carrier-neutral Internet data center services provider 21Vianet Group (VNET), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect 21Vianet Group to report revenue of $88.77 million on earnings of 7 cents per share.

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The current short interest as a percentage of the float for 21Vianet Group is pretty high at 8.3%. That means that out of the 30.22 million shares in the tradable float, 2.53 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.7%, or by about 223,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of VNET could easily soar sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, VNET is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is breaking out right now into new all-time-high territory, above some past overhead resistance levels at $27.24 to $27.50 a share. Market players should now watch for shares of VNET to print new highs post-earnings to possibly usher in a large short-squeeze trade.

If you're bullish on VNET, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its new all-time high of $28.26 a share (or above Thursday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 682,512 shares. If that breakout hits, then VNET will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $45 a share.

I would avoid VNET 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 $25.19 a share to its 50-day moving average of $23.34 a share with high volume. If we get that move, then VNET will set up to re-test or possibly take out its next major support levels at $20.78 a share to $19 to $18 a share.

Biolase

Another earnings short-squeeze prospect is medical technology player Biolase (BIOL), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Biolase to report revenue of $15.67 million on a loss of 4 cents per share.

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The current short interest as a percentage of the float for Biolase is very high at 19.9%. That means that out of the 24.87 million shares in the tradable float, 4.95 million shares are sold short by the bears. This is a large short position on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of BIOL could easily jump sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, BIOL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last month, with shares moving higher from its low of $2.21 to its recent high of $3.45 a share. During that uptrend, shares of BIOL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BIOL within range of triggering a big breakout trade post-earnings.

If you're bullish on BIOL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $3.45 to $3.55 a share with high volume. Look for volume on that move that hits near or above its three-month average action 586,410 shares. If that breakout triggers, then BIOL will set up to re-test or possibly take out its next major overhead resistance levels at $4.11 to $4.53 a share. Any high-volume move above those levels will then give BIOL a chance to tag $5 a share.

I would simply avoid BIOL 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 $2.90 a share to its 50-day at $2.76 and its 200-day at $2.66 a share with high volume. If we get that move, then BIOL will set up to re-test or possibly take out its next major support levels at $2.21 a share to $2 a share.

The Fresh Market

My final earnings short-squeeze play is specialty retailer The Fresh Market (TFM), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect The Fresh Market to report revenue of $356.98 million on earnings of 32 cents per share.

The current short interest as a percentage of the float for The Fresh Market is pretty high at 17.7%. That means that out of the 40.20 million shares in the tradable float, 7.15 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.2%, or by about 1.04 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of TFM could easily spike sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, TFM 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 five months, with shares sliding lower from its high of $53.76 to its recent low of $31.35 a share. During that downtrend, shares of TFM have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of TFM have now started to rebound higher off its recent low of $31.35 a share and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on TFM, 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 its 50-day moving average of $36.44 a share to more resistance at $36.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 916,535 shares. If that breakout materializes after earnings, then TFM will set up to re-test or possibly take out its next major overhead resistance levels at $40.39 to $41.83 a share. Any high-volume move above $41.83 to just above $42 a share will then give TFM a chance to re-fill some of its previous gap-down-day zone from last November that started just above $50 a share.

I would avoid TFM or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $33 to its 52-week low at $31.35 a share with high volume. If we get that move, then TFM will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $28 to $25 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 Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., 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.