Stock Quotes in this Article: MCP, PETM, RSH, YY, VEEV

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.

RadioShack

My first earnings short-squeeze play is electronics retailer RadioShack (RSH), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect RadioShack to report revenue of $1.12 billion on a loss of 15 cents per share.

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The current short interest as a percentage of the float for RadioShack is extremely high at 42.2%. That means that out of the 89.69 million shares in the tradable float, 40.61 million shares are sold short by the bears. This is a monster short interest on a stock with reasonably low float. Any bullish earnings news could easily spark a large short-covering rally for shares of RSH post-earnings.

From a technical perspective, RSH is currently trending above both its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last two months, with shares moving higher from its low of $2.02 to its intraday high of $2.79 a share. During that move, shares of RSH have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RSH within range of triggering a major breakout trade post-earnings.

If you're bullish on RSH, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $3.01 a share to some more near-term resistance at $3.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.53 million shares. If that breakout materializes after earnings, then RSH will set up to re-test or possibly take out its next major overhead resistance levels at $3.50 to $3.88 a share, or even $4.36 a share.

I would simply avoid RSH or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $2.47 a share to more near-term support at $2.36 a share with high volume. If we get that move, the RSH will set up to re-test or possibly take out its next major support levels at $2.18 to its 52-week low of $2.02 a share. Any high-volume move below $2.02 a share will then push shares of RSH into new 52-week-low territory, which is bearish technical price action.

Molycorp

Another potential earnings short-squeeze trade idea is rare earth minerals player Molycorp (MCP), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Molycorp to report revenue $148.22 million on a loss of 29 cents per share.

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The current short interest as a percentage of the float for Molycorp is extremely high at 35.6%. That means that out of the 186.01 million shares in the tradable float, 66.40 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of MCP could easily soar sharply higher post-earnings as the bears rush to cover some of the bets.

From a technical perspective, MCP is currently trending above its 50-day moving average and below is 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit over the last month, with shares moving higher from its low of $4.55 to its recent high of $5.62 a share. During that move, shares of MCP have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MCP back above its 50-day moving average and it's quickly pushing the stock within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on MCP, 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 $5.62 to $5.80 a share and then once it clears its 200-day moving average of $5.87 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6.71 million shares. If that breakout takes hold, then MCP will set up to re-test or possibly take out its next major overhead resistance level at $6.45 a share. Any high-volume move above $6.45 will then give MCP a chance to re-fill some of its previous gap-down-day zone from last October that started at $7.25 a share.

I would simply avoid MCP 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 $5.23 a share to more near-term support at $5.09 a share with high volume. If we get that move, then MCP will set up to re-test or possibly take out its next major support level at its 52-week low of $4.51 a share.

Veeva Systems

Another potential earnings short-squeeze candidate is cloud-based software solutions provider for the life sciences industry Veeva Systems (VEEV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Veeva Systems to report revenue of $58 million on earnings of 6 cents per share.

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The current short interest as a percentage of the float for Veeva Systems is extremely high at 44.4%. That means that out of the 15 million shares in the tradable float, 6.67 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-covering rally for shares of VEEV post-earnings.

From a technical perspective, VEEV is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending pretty strong for the last month, with shares moving higher from its low of $28.81 to its recent high of $38.08 a share. During that uptrend, shares of VEEV have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of VEEV are now trending right around some key overhead resistance levels that if taken out post-earnings could trigger a big breakout trade.

If you're bullish on VEEV, 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 $38.08 to $40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 862,605 shares. If that breakout hits, then VEEV will set up to re-test or possibly take out its next major overhead resistance levels at $45 to its all-time high at $49 a share. Any high-volume move above $49 post-earnings will then give VEEV a chance to trend north of $50 a share.

I would avoid VEEV 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 $33.68 a share to its 50-day moving average of $32.81 a share with high volume. If we get that move, then VEEV will set up to re-test or possibly take out its next major support levels at $30 to $28.71 a share. Any high-volume move below $28.71 a share would then push shares of VEEV into new all-time-low territory, which is bearish technical price action.

YY

Another earnings short-squeeze prospect is Chinese online social media platform operator YY (YY), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect YY Inc to report revenue of $84.48 million on earnings of 46 cents per share.

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The current short interest as a percentage of the float for YY is very high at 15.3%. That means that out of the 15.90 million shares in the tradable float, 2.44 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.2%, or by about 339,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of YY could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, YY 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 three months, with shares soaring higher from its low of $46.64 to its recent high of $77.90 a share. During that uptrend, shares of YY have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of YY within range of triggering a major breakout trade post-earnings.

If you're bullish on YY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high of $77.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.63 million shares. If that breakout hits, then YY will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that move are $95 to $100 a share.

I would simply avoid YY 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 $67.50 to $66.50 a share with high volume. If we get that move, then YY will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $62.65 a share to $56 a share.

PetSmart

My final earnings short-squeeze play is specialty retailer of pet products, services, and solutions PetSmart (PETM), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect PetSmart to report revenue of $1.83 billion on earnings of $1.21 per share.

The current short interest as a percentage of the float for PetSmart is pretty high at 9.9%. That means that out of the 102.89 million shares in the tradable float, 10.24 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.4%, or by about 965,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of PETM could easily surge sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, PETM is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $61.99 to $62.12 a share. Following that bottom, shares of PETM have started to spike higher and move back above its 50-day moving average. That move is now pushing shares of PETM within range of triggering a near-term breakout trade.

If you're in the bull camp on PETM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $70.20 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.56 million shares. If we get that move soon, then PETM will set up to re-test or possibly take out its next major overhead resistance levels at $74 to $75 a share, or even its 52-week high at $77.32 a share.

I would avoid PETM or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both it 50-day moving average of $66.68 a share to more near-term support at $63.61 a share with high volume. If we get that move, then PETM will set up to re-test or possibly take out its next major support levels $62.12 to $61.99 a share. Any high-volume move below those levels will then give PETM a chance to tag its next major support levels at $60 to $58 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.