Stock Quotes in this Article: BWLD, RAX, SGEN, THRX, BNNY

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.

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.

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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.

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Annie’s

My first earnings short-squeeze play is manufacturer and marketer of natural and organic foods Annie’s (BNNY), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Annie’s to report revenue of $36.60 million on earnings of 14 cents per share.

If you’re looking for a heavily-shorted stock that’s been beaten-down pretty bad heading into its earnings report, then make sure to check out shares of Annie’s. This stock has dropped 15% during the last six months, with shares currently trading just five points off its 52-week low of $31 a share.

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The current short interest as a percentage of the float for Annie’s is extremely high at 23.6%. That means that out of the 9.90 million shares in the tradable float, 2.33 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.7%, or by about 165,000 shares. If the bears are caught pressing their bets too hard into a strong quarter, then we could easily see a large short-squeeze develop for BNNY post-earnings.

From a technical perspective, BNNY is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last month, with shares moving between $33.95 on the downside and $38.80 on the upside. A high-volume move above the upper end of that recent range will trigger a near-term breakout trade for shares of BNNY.

If you’re bullish on BNNY, 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 $37.50 to $38.80 a share and then once it clears its 200-day moving average at $39.26 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 356,298 shares. If that breakout hits, then BNNY will set up to re-test or possibly take out its next major overhead resistance levels at $42 to $45 a share.

I would simply avoid BNNY 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 $35.68 to $35.56 a share with heavy volume. If we get that move, then BNNY will set up to re-test or possibly take out its next major support levels at $33.95 to $32.06 a share. Any high-volume move below $32.06 will then put its 52-week low of $31 into range for shares of BNNY.

Buffalo Wild Wings

Another potential earnings short-squeeze trade is restaurant owner and operator Buffalo Wild Wings (BWLD), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Buffalo Wild Wings to report revenue of $291.96 million on earnings of 95 cents per share.

Just recently, KeyBanc upgraded shares of Buffalo Wild Wings to buy from hold citing that several risks are already priced into the stock and valuation is compelling. The firm said that shares already reflect investors’ fears that the company will report lower-than-expected 2013 earnings per share due to rising chicken wing prices. KeyBanc has an $85 price target on the stock, and doesn’t expect the company to lower its 2013 earnings per share guidance.

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The current short interest as a percentage of the float for Buffalo Wild Wings is very high at 19.8%. That means that out of the 18.36 million shares in the tradable float, 3.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.7%, or by about 160,000 shares. If the bears are caught leaning too hard into a strong number, then shares of BWLD could rip higher post-earnings.

From a technical perspective, BWLD is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last two months and change, with shares moving higher from its low o $69.72 to its recent high of $78.46 a share. During that uptrend, shares of BWLD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BWLD within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on BWLD, 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 $78.02 to $78.46 a share and then once it clears its 200-day at $79.32 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 405,881 shares. If that breakout triggers, then BWLD will set up to re-fill some of its previous gap down zone from last October that started near $86 a share. Any high-volume move above $86 will then put $88 to $89.80 into range for shares of BWLD.

I would simply avoid BWLD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $74.70 a share with high volume. If we get that move, then BWLD will set up to re-test or possibly take out its next major support levels at $72.75 to $72.70 a share. Any high-volume move below those levels will then put $69.80 to $69.72 into range for shares of BWLD.

Seattle Genetics

One potential earnings short-squeeze candidate is biotechnology and drugs player Seattle Genetics (SGEN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Seattle Genetics to report revenue of $57.21 million on a loss of 11 cents per share.

If you’re looking for a strong trending stock heading into its quarterly report, then make sure to take a hard look at shares of Seattle Genetics. This stock is up 28% during the last three months, and it has hit a 52-week high today at $30.85 a share.

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The current short interest as a percentage of the float for Seattle Genetics is pretty high at 19.3%. That means that out of the 98.03 million shares in the tradable float, 22.49 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then this stock could easily explode higher post-earnings.

From a technical perspective, SGEN 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 soaring higher from its low of $22.71 to its recent high of $30.85 a share. During that uptrend, shares of SGEN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SGEN within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on SGEN, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new 52-week high above $30.85 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 770,805 shares. If that breakout triggers, then SGEN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $45 a share.

I would avoid SGEN 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 $28.82 to $28.36 a share with high volume. If we get that move, then SGEN will set up to re-test or possibly take out its 50-day moving average of $26.67 a share or its 200-day moving average of $25.12 a share.

Theravance

Another earnings short-squeeze play is biotechnology and drugs player Theravance (THRX), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Theravance to report revenue of $3.88 million on a loss of 42 cents per share.

If you’re looking for a heavily-shorted stock that’s been beaten down noticeably heading into its quarterly report, then make sure to check out shares of Theravance. This stock is off by 15% during the last six months, and it’s currently trading about six points above its 52-week low of $15.69 a share.

The current short interest as a percentage of the float for Theravance is notable at 11.5%. That means that out of the 54.52 million shares in the tradable float, 7.93 million shares are sold short by the bears. Any bullish earnings news could easily spark a sharp short-covering rally for shares of THRX post-earnings.

From a technical perspective, THRX is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has started to flirt with its 50-day moving average of $22.03 today, since shares have hit an intraday high of $22.33 a share. That move is quickly pushing the stock within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on THRX, 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 $22.96 to $23.57 a share and then once it clears more resistance at $23.86 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 614,331 shares. If that breakout triggers, then THRX will set up to re-test or possibly take out its next major overhead resistance levels at $25.67 to $27.52 a share.

I would avoid THRX 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 at $21.75 a share with high volume. If we get that move, then THRX will set up to re-test or possibly take out its next major support levels at $19.98 to $19.61 a share. Any high-volume move below $19.61 will then put $18 to $17.06 into range for shares of THRX.

Rackspace

My final earnings short-squeeze trade idea is cloud computing player Rackspace (RAX), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Rackspace to report revenue of $355.42 million on earnings of 22 cents per share.

This company has registered double-digit year-over-year percentage revenue growth for the last four quarters. Over that timeframe, the company has averaged growth of 29.7%, with the biggest growth seen in the fourth quarter of the last fiscal year when revenue jumped 31.9%. Rackspace has reported increasing profits for three quarters in a row. During the most recent quarter, its profit jumped 36.1% year-over-year.

The current short interest as a percentage of the float for Rackspace stands at 8.4%. That means that out of the 111.60 million shares in the tradable float, 9.36 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to send shares of RAX screaming higher post-earnings if the company can deliver the numbers the bulls are looking for.

From a technical perspective, RAX 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 higher from its low of $58.56 to its recent high of $81.36 a share. During that uptrend, shares of RAX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RAX within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on RAX, 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 $75 to $77.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.2 million shares. If that breakout triggers, then RAX will set up to re-test or possibly take out its 52-week high of $81.36 a share. Any high-volume move above $81.36 will then send RAX into new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $85 to $90 a share.

I would simply avoid RAX 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 $72.07 to $70 a share with high volume. If we get that move, then RAX will set up to re-test or possibly take out its next major support levels at $67.50 to $65 a share. Any high-volume move below $65 will then put $62.50 to $60 into range for shares of RAX.

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.