Stock Quotes in this Article: DRI, KBH, KMX, RIMM, WGO

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.

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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.

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.

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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.

Research In Motion

My first earnings short-squeeze play is Research In Motion (RIMM), which is set to release numbers on Thursday after the market close. This company designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. It provides platforms and solutions for access to information, including email, voice, instant messaging. Wall Street analysts, on average, expect Research In Motion to report revenue of $2.65 billion on a loss of 35 cents per share.

If you're looking for a heavily-shorted stock that's been uptrending very strong heading into its earnings report, then make sure to check out shares of Research In Motion. This stock has been on fire during the last three months, with shares soaring by over 80%.

The current short interest as a percentage of the float for Research In Motion is extremely high at 24.3%. That means that out of the 486.37 million shares in the tradable float, 113.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.1%, or by about 9.49 million shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a monster short-squeeze develop for shares of RIMM.

From a technical perspective, RIMM 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 a low of $6.22 to a recent high of $14.21 a share. During that uptrend, shares of RIMM have been consistently making higher lows and higher highs, which is bullish price action. That move has now pushed RIMM within range of triggering a major breakout trade post-earnings.

If you're bullish on RIMM, 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 $14.21 to $14.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 34,476,100 shares. If that breakout triggers, then RIMM will set up to re-test or possibly take out its next major overhead resistance levels at $17.96 to $19.95 a share.

I would simply avoid RIMM 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 $12 to $11.25 a share with high volume. If we get that move, then RIMM will set up to re-test or possibly take out its 200-day at $9.89 a share or its 50-day at $9.75 a share.

KB Home

Another potential earnings short-squeeze trade idea is KB Home (KBH), which is set to release its numbers on Thursday before the market open. This company constructs and sells homes through its operating divisions across the United States under the name KB Home. Wall Street analysts, on average, expect KB Home to report revenue of $567.06 million on earnings of 6 cents per share.

This company is looking to beat Wall Street estimates for the third straight quarter in a row. During the last quarter, KB Home reported a net loss of 10 cents per share versus Wall Street estimates of a loss of 17 cents per share, and in the quarter before that, the company topped estimates by 5 cents with a net loss of 31 cents per share versus Wall Street estimates of a loss of 36 cents per share.

The current short interest as a percentage of the float for KB Home is extremely high at 34.4%. That means that out of the 65.63 million shares in the tradable float, 22.59 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a sizable short-squeeze for shares of KBH.

From a technical perspective, KBH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last month and change, with shares moving higher from a low of $13.09 to its recent high of $16.70 a share. During that uptrend, shares of KBH have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed KBH within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on KBH, 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 $16.88 to $17.27 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6,444,380 shares. If that breakout hits, then KBH will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets are $20 to $23 a share.

I would simply avoid KBH or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $15.31 a share with high volume. If we get that action, then KBH will set up to re-test or possibly take out its next major support levels at $14 to $13.09 a share.

Darden Restaurants

One potential earnings short-squeeze candidate is Darden Restaurants (DRI), which is set to release numbers on Thursday before the market open. This company operates in the full-service dining segment of the restaurant industry, mainly in the United States. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $1.95 billion on earnings of 26 cents per share.

During the last quarter, this company beat Wall Street estimates by 2 cents, after it reported a profit of 85 cents per share versus estimates of 83 cents per share. This company fell in line with Wall Street estimates during the fourth quarter of the last fiscal year. On the top line, Darden Restaurants is looking to register its fifth straight revenue increase heading into this quarter.

The current short interest as a percentage of the float for Darden Restaurants sits at 6%. That means that out of the 127.59 million shares in the tradable float, 7.66 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 266,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could see a sizeable short-squeeze develop for shares of DRI.

From a technical perspective, DRI is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down big from around $53 a share to below $47 a share with heavy volume. Following that gap down, shares of DRI went on to print a new low of $45.26 a share. Shares of DRI have since then started to rebound and approach a near-term breakout trade back above its gap down day high.

If you're bullish on DRI, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its gap down day high of $48.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1,516,740 shares. If that breakout triggers, then DRI will set up to re-fill some of that previous gap that started near $53 a share.

I would avoid DRI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its recent low print of $45.26 a share with high volume. If we get that move, then DRI will set up to re-test or possibly take out its next major support levels at $42 to $40.15 a share.

Winnebago Industries

Another earnings short-squeeze trade idea is Winnebago Industries (WGO), which is set to release numbers on Thursday before the market open. This is manufacturer of motor homes which are self-contained recreation vehicles used mainly in leisure travel and outdoor recreation activities. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $155.29 million on earnings of 10 cents per share.

If you're looking for a heavily-shorted stock that's been uptrending very strong heading into its earnings report, then make sure to check out shares of Winnebago Industries. This stock has been trending very hot so far in 2012, with shares up a whopping 93%.

The current short interest as a percentage of the float for Winnebago Industries is notable at 6.4%. That means that out of the 27.99 million shares in the tradable float, 1.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.2%, or by about 121,000 shares. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally if the bulls get the earnings news they're looking for.

From a technical perspective, WGO 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 six months, with shares soaring from a low of $9.52 to a recent high of $14.49 a share. During that uptrend, shares of WGO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed WGO within range of triggering a near-term breakout trade post-earnings.

If you're bullish on WGO, 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 $14.49 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 208,858 shares. If that breakout hits, then WGO will set up to re-test or possibly take out its next major overhead resistance levels at $16 to $16.60 a share. Any high-volume move above $16.60 a share will then put $18 to $20 into focus for shares of WGO.

I would avoid WGO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $13.24 a share with heavy volume. If we get that move, then WGO will set up to re-test or possibly take out its next major support levels at $12.73 to $12 a share. Any high-volume move below $12 will then put $11 into focus for shares of WGO.

CarMax

My final earnings short-squeeze play is CarMax (KMX), which is set to release numbers on Thursday before the market open. This is a retailer of used vehicles in the United States. It also sells new vehicles under franchise agreements with four new car manufacturers (Chrysler, General Motors, Nissan and Toyota). Wall Street analysts, on average, expect CarMax to report revenue of $2.46 billion on earnings of 39 cents per share.

During the last quarter, this company missed Wall Street estimates by 4 cents per share after coming in at a net income of 48 cents per share versus estimates of 52 cents per share. The company fell in line with expectations during the first quarter. On the top line, CarMax is looking to register its fifth straight quarter in a row of revenue increases heading into this quarter.

The current short interest as a percentage of the float for CarMax stands at 5.3%. That means that out of the 227.56 million shares in the tradable float, 12.13 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a short-covering rally if the bulls get the earnings news they're looking for.

From a technical perspective, KMX 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 moving higher from a low of $28.04 to its recent high of $36.65 a share. During that uptrend, shares of KMX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KMX within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on KMX, 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 $36.65 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2,238,720 shares. If that breakout hits, then KBH will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets are $40 to $43 a share.

I would simply avoid KMX or look for short-biased trades if after its report the stock fails to trigger that breakout, and then drops back below its 50-day at $34.10 a share with heavy volume. If we get that action, then KMX will set up to re-test or possibly take out its next major support levels at $32.79 to $31 a share. Any high-volume move below those levels will then put its 200-day at $30.86 into focus for shares of KMX.

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.