Stock Quotes in this Article: ATU, FDS, HEI, NAV, SAFM

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.

Navistar International

My first earnings short-squeeze trade idea is Navistar International (NAV), which is set to release numbers on Wednesday before the market open. This company produces International brand commercial and military trucks, MaxxForce brand diesel engines, IC Bus brand school and commercial buses, Monaco RV brands of recreational vehicles, and Workhorse brand chassis. Wall Street analysts, on average, expect Navistar International to report revenue of $3.18 billion on a loss of $1.12 per share.

If you're looking for a heavily-shorted stock that's been beaten-down heading into its earnings report, then make sure to check out shares of Navistar International. This stock has been hammered by the bears so far in 2012, with shares off by a whopping 41%.

The current short interest as a percentage of the float for Navistar International is rather high at 16%. That means that out of the 57.62 million shares in the tradable float, 12.58 million shares are sold short by the bears. Any bullish earnings news could easily spark a massive short-squeeze for shares of NAV post-earnings.

From a technical perspective, NAV 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 uptrending modestly for the last two months, with shares trading higher from a low of $18.17 a share to its recent high of $22.61 a share. During that uptrend, shares of NAV have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed NAV within range of triggering a near-term breakout trade post-earnings.

If you're bullish on NAV, 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 $22.61 to $23.47 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,951,720 shares. If that breakout hits, then NAV will set up to re-test or possibly take out its next major overhead resistance levels at $26.38 a share to its 200-day at $27.08 a share.

I would simply avoid NAV or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $20.57 a share with high volume. If we get that move, then NAV will set up to re-test or possibly take out its next major support levels at $19.24 to $18.17 a share. Any move below $18.17 a share would then push NAV into new 52-week low territory, which is bearish technical price action.

FactSet Research Systems

Another potential earnings short-squeeze play is FactSet Research Systems (FDS) which is set to release its numbers on Tuesday before the market open. This company is a provider of integrated global financial and economic information, including fundamental financial data on tens of thousands of companies worldwide. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $212.26 million on earnings of $1.11 per share.

During the last quarter, this company topped Wall Street estimates by 4 cents, after coming in at a net income of $1.11 a share versus estimates of $1.07 per share. That marked the fourth straight quarter in a row that the company Wall Street beat estimates.

The current short interest as a percentage of the float for FactSet Research Systems is pretty high at 10.8%. That means that out of the 41.01 million shares in the tradable float, 4.43 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.3%, or by about 225,000 shares. If the bears are caught leaning too hard into this quarter, then we could see a sharp move higher in the stock as they rush to cover some of their short bets.

From a technical perspective, FDS is currently trending above its 50-day moving average and right below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month and change, with shares moving higher from a low of $86.80 a share to its recent high of $96.50 a share. During that move, shares of FDS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed FDS within range of triggering a near-term breakout trade.

If you're in the bull camp on FDS, 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 $96.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 366,184 shares. If that breakout hits, then FDS will set up to re-test or possibly take out its next major overhead resistance levels at $101 to $104.46 a share.

I would simply avoid FDS 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 $93 to $92 a share with high volume. If we get that move, then FDS will set up to re-test or possibly take out its next major support levels at $90 to $86.80 a share.

Actuant

One potential earnings short-squeeze candidate is Actuant (ATU), which is set to release numbers on Wednesday before the market open. This company is a global manufacturer and marketer of a range of industrial products and systems. Wall Street analysts, on average, expect Actuant to report revenue of $396.37 million on earnings of 50 cents per share.

This company has topped Wall Street estimates during the last four quarters and it's coming off a quarter where it beat by one cent, after reporting a profit of 55 cents per share against estimates of 54 cents per share.

The current short interest as a percentage of the float for Actuant is pretty high at 9.8%. That means that out of the 67.45 million shares in the tradable float, 6.60 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.8%, or by about 591,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could see a decent short-covering rally post-earnings.

From a technical perspective, ATU 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 and change, with shares moving higher from a low of $25.38 a share to its recent high of $29.65 a share. During that uptrend, shares of ATU have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed ATU within range of triggering a near-term breakout trade post-earnings.

If you're bullish on ATU, 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 $29.65 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 553,982 shares. If that breakout triggers, then ATU will set up to re-test or possibly take out its 52-week high of $31.33 a share. Some possible upside targets above that 52-week high are $33 to $35 a share.

I would avoid ATU or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day at $28.04 a share and its 200-day at $27.72 a share with high volume. If we get that move, then ATU will set up to re-test or possibly take out its next major support levels at $26.50 to $25.38 a share.

Heico

Another earnings short-squeeze play is Heico (HEI), which is set to release numbers on Tuesday after the market close. This company is engaged in the design, manufacture and sale of aerospace, defense and electronics related products and services throughout the United States and internationally. Wall Street analysts, on average, expect Heico to report revenue of $237.38 million on earnings of 43 cents per share.

The current short interest as a percentage of the float for Heico is rather high at 13.7%. That means that out of the 44.37 million shares in the tradable float, 2.19 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.5%, or by about 54,000 shares. Any bullish earnings news could spark a notable short-squeeze for shares of HEI post-earnings.

From a technical perspective, HEI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently gapped down from $43.86 a share to its recent low of $40.31 a share. Prior to that gap, shares of HEI had been uptrending, with the stock moving higher from $36.27 to $43.86 a share. Shares of HEI are now trading within range of triggering a near-term breakout trade above its gap down day high.

If you're bullish on HEI, 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 $41.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 141,955 shares. If that breakout triggers, then HEI will set up to re-test or possibly take out its next major overhead resistance level at $43.86 a share. Any high-volume move above $43.86 will then put $46 into focus for shares of HEI.

I would avoid HEI 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 $40.31 to $40 a share with heavy volume. If we get that move, then HEI will set up to re-test or possibly take out its 50-day at $38.75 a share and its 200-day at $38.07 a share.

Sanderson Farms

My final earnings short-squeeze play is Sanderson Farms (SAFM), which is set to release numbers on Tuesday before the market open. This company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Wall Street analysts, on average, expect Sanderson Farms to report revenue of $635.75 million on earnings of 32 cents per share.

The current short interest as a percentage of the float for Sanderson Farms stands at 6.4%. That means that out of the 17.77 million shares in the tradable float, 1.28 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough on a stock with a low float to spark a decent short-covering rally post-earnings.

From a technical perspective, SAFM 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 $42.95 to its recent high of $50.46 a share. During that uptrend, shares of SAFM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SAFM within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on SAFM, then I would wait until after its report and look for long-biased trades once it breaks out above some near-term overhead resistance at $50.46 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 227,973 shares. If that breakout hits, then SAFM will set up to re-test or possibly take out its next major overhead resistance levels at $54 to $55.40 a share.

I would simply avoid SAFM if after its report the stock fails to trigger that breakout, and then drops back below some key near-term support levels at $49 to $48 a share with heavy volume. If we get that move, then SAFM will set up to re-test or possibly take out its 50-day at $46.70 and its 200-day at $47.06 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.