Stock Quotes in this Article: BWS, DSW, NUAN, RAVN, ZLC

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.

Nuance Communications

My first earnings short-squeeze play is Nuance Communications (NUAN), which is set to release numbers on Monday after the market close. This is a provider of voice and language solutions for businesses and consumers around the world. Wall Street analysts, on average, expect Nuance Communications to report revenue of $496.51 million on earnings of 48 cents per share.

Just recently, Oppenheimer said that they believe Nuance Communications trends remain solid and they anticipate the company's results to be at least in-line with expectations. The firm expects Nuance to provide fiscal year 2013 guidance that shows double digit growth rates and Oppenheimer maintains an outperform rating on the stock.

The current short interest as a percentage of the float for Nuance Communications is notable at 7%. That means that out of the 245.42 million shares in the tradable float, 17.24 million shares are sold short by the bears.

From a technical perspective, NUAN is currently trending below both its 200-day and 50-day moving averages, which is bearish. This stock has been downtrending during the last two months, with shares dropping from its high of $25.89 to its recent low of $20.14 a share. During that move lower, shares of NUAN have been consistently making lower highs and lower low, which is bearish technical price action. That said, the stock has started to find some high-volume buying interest right above some previous support at $19.58 a share.

If you're bullish on NUAN, then I would wait until after its report and look for long-biased trades as long as this stock is trending above $20.14 to $19.58 a share with strong upside volume flows. I would consider any upside volume day that registers near or above its three-month average volume of 2,627,150 shares as bullish. Some possible upside targets are $23 to $25 a share if NUAN gets squeezed post-earnings.

I would simply avoid NUAN or look for short-biased trades if after earnings it drops back below some key near-term support levels at $19.58 to $19.33 a share with heavy volume. If we get that action, then NUAN will set up to re-test or possibly take out its next major support levels at $18 to 17 a share. Keep in mind that any move below $19.33 a share will push NUAN into new 52-week low territory, which is bearish technical price action.

DSW

Another potential earnings short-squeeze trade is DSW (DSW), which is set to release its numbers on Tuesday before the market open. This is a retailer of footwear and accessories. It offers a wide assortment of brand name and designer dress, casual and athletic footwear for women and men. Wall Street analysts, on average, expect DSW to report revenue of $589.15 million on earnings of 89 cents per share.

Just this morning, Brean Capital said they remain aggressive buyers of DSW ahead of its third quarter results. The firm cited valuation, trends showing the store ramp is on track, and the spread of brand awareness. The firm has the stock rated a buy with a $72 price target.

The current short interest as a percentage of the float for DSW is rather high at 10.3%. That means that out of the 37.42 million shares in the tradable float, 3.51 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.9%, or by about 227,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, DSW is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last two months, with shares falling from a high of $69.15 to a recent low of $57.27 a share. During that move lower, shares of DSW have been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to bounce hard right off its 200-day moving average of $58.28 and it's now pushing within range of triggering a near-term breakout trade.

If you're in the bull camp on DSW, then I would wait until after its report and look for long-biased trades once it manages to break out above its 50-day at $64.18 and then above some near-term overhead resistance at $64.27 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 472,808 shares. If we get that breakout, then look for DSW to trend up towards its next significant overhead resistance levels at $68 to $69.15 a share. Keep in mind that any move above $69.15 will push DSW into new 52-week high territory, which is bullish technical price action.

I would simply avoid DSW or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below some near-term support levels at $58.28 to $57.27 a share with high volume. If we get that move, then look or DSW to re-test or possibly take out its next major support levels at $54.07 to $53.97 a share.

Zale

One potential earnings short-squeeze trade is Zale (ZLC), which is set to release numbers on Tuesday after the market close. This company is a specialty retailer of fine jewelry in North America. Wall Street analysts, on average, expect Zale to report revenue of $364.65 million on a loss of 67 cents per share.

During the last quarter, this company beat estimates by 23 cents, coming in at a net loss of 61 cents per share versus Wall Street estimates of a loss of 84 cents per share. That registered the fourth straight quarter in a row that Zale has topped Wall Street estimates.

The current short interest as a percentage of the float for Zale sits at 6.7%. That means that out of the 27.13 million shares in the tradable float, 2.12 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally if Zale can deliver the earnings news the bulls are looking for.

From a technical perspective, ZLC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strongly for the past five months, with shares soaring from a low of $2.52 to its recent high of $7.66 a share. During that uptrend, shares of ZLC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed the stock within range of triggering a near-term breakout trade post-earnings.

If you're bullish on ZLC, then I would wait until after its report and look for long-biased trades if it can manage to break out above some near-term overhead resistance at $7.66 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 779,286 shares. If ZLC triggers that breakout, then this stock will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets are $9 to $10 a share.

I would avoid ZLC or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $6.75 to $6.57 a share with high volume. If we get that action, then ZLC will set up to re-test or possibly take out its next major support levels at $5.95 to $5.45 a share. Any high-volume move below $5.45 could send ZLC back towards its 200-day moving average of $3.94 a share.

Brown Shoe Company

Another earnings short-squeeze candidate is the Brown Shoe Company (BWS), which is set to release numbers on Thursday before the market open. This is a footwear retailer and wholesaler, which provides an offering of licensed, branded and private-label casual, dress and athletic footwear products to women, men and children. Wall Street analysts, on average, expect the Brown Shoe Company to report revenue of $703.27 million on earnings of 46 cents per share.

This stock has been uptrending very strong heading into earnings, with shares up a whopping 76% so far in 2012. Shares of the Brown Shoe Company are currently trading just one point off its 52-week high of $16.88 ahead of its report.

The current short interest as a percentage of the float for the Brown Shoe Company stands at 6.5%. That means that out of the 40.38 million shares in the tradable float, 2.61 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a decent short-squeeze post-earnings.

From a technical perspective, BWS is currently trending above its 200-day moving averages and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending very strong for the last five months, with shares soaring from a low of $10.98 to its recent high of $16.88 a share. During that uptrend, shares of BWS have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed BWS within range of triggering a major breakout trade post-earnings.

If you're bullish on BWS, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above its 50-day moving average at $15.89 and then above some near-term overhead resistance levels at $16.68 to $16.88 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 459,040 shares. If we get that breakout, then look for BWS to trend north of $20 a share post-earnings.

I would avoid BWS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support at $14.77 a share with heavy volume. If we get that action, then BWS will set up to re-test or possibly take out its next major support levels at $13.62 to $13.16 a share.

Raven Industries

My final earnings short-squeeze trade idea is Raven Industries (RAVN), which is set to release numbers on Tuesday before the market open. This company manufactures various products for industrial, agricultural, energy, construction, and military/aerospace markets primarily in North America. Wall Street analysts, on average, expect Raven Industries to report revenue of $101.74 million on earnings of 34 cents per share.

If you're looking for a beaten-down heavily-shorted stock heading into its quarter, then make sure to check out shares of Raven Industries. This stock has been hammered by the bears during the last three months, with shares off by over 20%.

The current short interest as a percentage of the float for Raven Industries stands at 5.6%. That means that out of the 35.57 million shares in the tradable float, 1.98 million shares are sold short by the bears. The bears have been increasing their bets from the last reporting period by 17.4%, or by about 293,000 shares. If the bears are caught pressing their bets too hard into this report, then we could easily see a decent short-squeeze develop post-earnings.

From a technical perspective, RAVN 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 falling from its high of $37.60 to its recent low of $25.11 a share. During that downtrend, shares of RAVN have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on RAVN, then I would wait until after its report and look for long-biased trades as long as this stock is trending above its recent low of $25.11 a share with strong upside volume flows. I would consider any upside volume day that registers near or above its three-month average action of 128,316 shares as bullish. If we get that action, then look for RAVN to re-test or possibly take out its 50-day moving average of $28.57 a share.
I would simply avoid RAVN or look for short-biased trades if after earnings it fails to trigger that move, and then moves back below some key support levels at $25.11 to $24.84 a share with heavy volume. If we get that action, then RAVN will set up to re-test or possibly take out its next major support levels at $22.47 to $21.33 a share post-earnings.

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.