Stock Quotes in this Article: ADBE, HOV, PAY, ZQK, RH

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.

Hovnanian Enterprises

My first earnings short-squeeze play is Hovnanian Enterprises (HOV), which is set to release numbers on Thursday before the market open. This company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill and active adult homes in planned residential developments. Wall Street analysts, on average, expect Hovnanian Enterprises to report revenue of $461.75 million on a loss of 6 cents per share.

The current short interest as a percentage of the float for Hovnanian Enterprises is extremely high at 31.4%. That means that out of the 105.54 million shares in the tradable float, 32.77 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 2.74 million shares. If the bears are caught pressing their bets too hard into the quarter, then we could easily see an explosive move higher post-earnings.

From a technical perspective, HOV 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 moving from a low of $2.23 to its recent high of $5.80 a share. During that uptrend, shares of HOV have been consistently making higher lows and higher highs, which is bullish price action. That move has now pushed shares HOV within range of triggering a near-term breakout trade post-earnings.

If you're bullish on HOV, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some near-term overhead resistance levels at $5.62 to $5.80 a share, or once it takes out its intraday high on Wednesday if it's above those levels with high volume. Look for volume on that move that hits near or above its three-month average action of 8,060,840 shares. If that breakout triggers, then HOV will set up to re-test or possibly take out its next major overhead resistance levels at $6.50 to $7.50 a share.

I would simply avoid HOV or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $5 a share with high volume. If we get that move, then HOV will set up to re-test or possibly take out its next major support levels at $4.75 a share to its 50-day at $4.59 a share.

Adobe Systems

Another potential earnings short-squeeze trade is Adobe Systems (ADBE), which is set to release its numbers on Thursday after the market close. This company offers a line of software and services used by creative professionals, marketers, developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling operating systems. Wall Street analysts, on average, expect Adobe Systems to report revenue of $1.10 billion on earnings of 57 cents per share.

During the past three quarters, this company's quarterly results have missed Wall Street estimates. For the last quarter, the company reported net income of 44 cents per share versus Wall Street estimates of 47 cents per share.

The current short interest as a percentage of the float for Adobe Systems stands at 3.5%. That means that out of the 461.48 million shares in the tradable float, 17.36 million shares are sold short by the bears. This is far from a huge short interest, but it's more than enough to spark a decent short-covering rally if ADBE gives the bulls what they're looking for.

From a technical perspective, ADBE is currently trending well 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 moving from a low of $29.52 to its intraday high today of $36.11 a share. During that uptrend, shares of ADBE have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed ADBE within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on ADBE, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some past overhead resistance at $37.40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3,960,780 shares. If that breakout triggers, then ADBE will set up to hit or trend north of $40 a share.

I would simply avoid ADBE 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 $35 to $34.50 a share with high volume. If we get that move, then ADBE will set up to re-test or possibly take out its next major support level at its 50-day moving average of $33.39 a share.

Restoration Hardware

One potential earnings short-squeeze candidate is Restoration Hardware (RH), which is set to release numbers on Wednesday after the market close. This company operates as a luxury brands in the home furnishings marketplace. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $282.39 million on earnings of 4 cents per share.

Just recently, Robert W. Baird started coverage on shares of Restoration Hardware with an outperform rating and a $43 price target. The current short interest as a percentage of the float for Restoration Hardware is rather high at 11.9%. That means that out of the 30.82 million shares in the tradable float, 224,000 shares are sold short by the bears.

From a technical perspective, RH has been uptrending strong since it came public back in early November, with shares soaring from around $30 to its recent high of $38.33 a share. During that uptrend, shares of RH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed RH within range of triggering a near-term breakout trade post-earnings.

If you're bullish on RH, then I would wait until after its report and look for long-biased trades once this stock breaks out above some near-term overhead resistance levels at $37.47 to $38.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 479,681 shares. If that breakout hits, then RH will set up to trade in new all-time territory, which is bullish technical rice action .Some possible targets are $40 to $45 a share.

I would avoid RH 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 $35.49 to $35.30 a share with high volume. If we get that move, then RH will set up to re-test or possibly take out its next major support levels at $34 to $31.50 a share.

VeriFone Systems

Another earnings short-squeeze trade idea is VeriFone Systems (PAY), which is set to release numbers on Thursday after the market close. This company designs, markets, and services transaction automation systems that enable secure electronic payments among consumers, merchants, and financial institutions. Wall Street analysts, on average, expect VeriFone Systems to report revenue of $495.20 million on earnings of 76 cents per share.

This company's quarterly results have come in ahead of Wall Street estimates for the last three quarters in a row. During the last quarter, the company reported a net income of 64 cents per share versus Wall Street estimates of 61 cents per share. This company has averaged year-over-year revenue growth of 53.1% over the last four quarters.

The current short interest as a percentage of the float for VeriFone Systems is rather high at 10.9%. That means that out of the 106.07 million shares in the tradable float, 11.57 million shares are sold short by the bears. Any bullish earnings news from PAY could easily spark a large short-covering rally post-earnings.

From a technical perspective, PAY is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been mildly uptrending for the last two months, with shares moving higher from a low of $27.33 to its recent high of $33.93 a share. During that move, shares of PAY were mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed PAY within range of triggering a major breakout trade post-earnings.

If you're bullish on PAY, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some key overhead resistance levels at $33.93 to $35.61 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2,818,540 shares. If that breakout triggers, then PAY will set up to re-test or possibly take out its next major overhead resistance levels at $38.04 to $39 a share.

I would avoid PAY 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 $32.50 to $31.50 a share with heavy volume. If we get that move, then PAY will set up to re-test or possibly take out its 50-day at $30.71 a share. Any move below its 50-day will then put $29.55 to $28.60 a share into focus for shares of PAY.

Quicksilver

My final earnings short-squeeze play is Quicksilver (ZQK), which is set to release numbers on Thursday after the market close. This company designs, develops and distributes branded apparel, footwear, accessories and related products, catering to the casual, youth lifestyle associated with the sports of surfing, skateboarding and snowboarding. Wall Street analysts, on average, expect Quicksilver to report revenue of $562.99 million on earnings of 10 cents per share.

During the last quarter, this company beat Wall Street estimates by 3 cents, after reporting a profit of 9 cents per share versus Wall Street estimates of 6 cents per share. This followed two straight quarters where Quicksilver fell short of Wall Street estimates.

The current short interest as a percentage of the float for Quicksilver sits at 3.9%. That means that out of the 114.11 million shares in the tradable float, 4.5 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.7%, or by about 610,000 shares. If the bears are caught leaning too hard into the quarter, then we could easily see a decent short-squeeze develop post-earnings.

From a technical perspective, ZQK 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 moving from its low of $2.09 to its recent high of $4.24 a share. During that uptrend, shares of ZQK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed ZQK within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on ZQK, then I would wait until after its report and look for long-biased trades once it breaks out above some key overhead resistance levels at $4.25 to $4.61 a share and then above $4.89 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,230,900 shares. If that breakout triggers, then ZQK will set up to re-test or possibly take out its next major overhead resistance levels at $5.58 to $5.70 a share.

I would simply avoid ZQK if after its report the stock fails to trigger that breakout, and then drops back below some key near-term support levels at $4 to $3.83 a share with high volume.

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.