Stock Quotes in this Article: CREE, DV, LL, NFLX, AWAY

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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Netflix

My first earnings short-squeeze play is Internet subscription service streaming television shows and movies player Netflix (NFLX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.02 billion on earnings of 18 cents per share.

Andy Hargreaves, of Pacific Crest Securities, recently said he expects solid first-quarter results from Netflix, including the addition of 1.74 million U.S. streaming subscribers, and another 1.1 million additional subscribers in the company’s international markets. Hargreaves has an outperform rating on the stock and $225 price target.

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The current short interest as a percentage of the float for Netflix is pretty high at 13.7%. That means that out of the 49.18 million shares in the tradable float, 7.49 million shares are sold short by the bears. If Netflix can deliver the earnings news the bulls are looking for, then we could easily see a monster short-squeeze for this stock post-earnings.

From a technical perspective, NFLX is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last month, with shares moving between $182.35 on the upside and $159 on the downside. A high-volume move above the upper-end of its recent range could easily trigger a major breakout trade for NFLX.

If you’re bullish on NFLX, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 50-day moving average of $180.11 a share and then once it breaks out above some more near-term overhead resistance at $182.35 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.63 million shares. If that breakout triggers, then NFLX will set up to re-test or possibly take out its next major overhead resistance levels at $197.06 to $197.62 a share. Any move above $197.62 would then push NFLX into new 52-week-high territory, which is bullish price action.

I would simply avoid NFLX 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 $161.80 to $159 a share with high volume. If we get that move, then NFLX will set up to re-test or possibly take out its gap up day high from January at around $150 a share. Any high-volume move below $140 would then push NFLX into that gap up zone that started around $100 a share.

HomeAway

Another potential earnings short-squeeze trade is HomeAway (AWAY), an online marketplace for the vacation rental industry, which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect HomeAway to report revenue of $78.64 million on earnings of 13 cents per share.

The current short interest as a percentage of the float for HomeAway is very high at 18.2%. That means that out of the 62.63 million shares in the tradable float, 8.82 million shares are sold short by the bears. Any bullish earnings news from Home Away could easily spark a solid short-covering rally for the stock post-earnings.

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From a technical perspective, AWAY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last month and change, with shares moving between $29.14 on the downside and $34.30 on the upside. A high-volume move above the upper-end of its recent range could easily trigger a near-term breakout trade for shares of AWAY.

If you’re in the bull camp on AWAY, 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 $33 to $34.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 990,000 shares. If that breakout his, then AWAY will set up to enter new 52-week-high territory above $34.30, which is bullish technical price action. Some possible upside targets off that breakout are $38 to $42 a share.

I would simply avoid AWAY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below key near-term support levels at $31.49 to its 50-day at $30 and then below more support at $29.14 a share with high volume. If we get that move, then AWAY will set up to re-test or possibly take out its next major support levels $27.75 to $25 a share.

Cree

Another potential earnings short-squeeze candidate is Cree (CREE), a provider of lighting-class LED products, lighting products and semiconductor products, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue of $342.76 million on earnings of 34 cents per share.

The current short interest as a percentage of the float for Cree is pretty high at 12.4%. That means that out of the 113.60 million shares in the tradable float, 14.24 million shares are sold short by the bears. This stock has a history of explosive moves higher when it reports solid numbers. If Cree can give the bulls what they’re looking for, then we could see another monster squeeze this week.

From a technical perspective, CREE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending modestly for the last month, with shares moving higher from its low of $48.40 to its recent high of $55.55 a share. During that uptrend, shares of CREE have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CREE within range of triggering a major breakout trade post-earnings.

If you’re bullish on CREE, 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 $55.55 to $55.66 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.53 million shares. If we get that breakout, then CREE will set up to re-fill some of its previous gap down zone from February of 2011 that started near $65 a share. This stock could even trade above $70 if the quarter is a blowout.

I would avoid CREE 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 $52.04 to its 50-day at $50.57 a share with high volume. If we get that move, then CREE will set up to re-test or possibly take out its next major support levels $48.40 to $43 a share.

DeVry

Another earnings short-squeeze prospect is educational services provider DeVry (DV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect DeVry to report revenue of $516.64 million on earnings of 82 cents per share.

Just recently, Compass Point initiated coverage on DeVry with a buy rating and a price target of $37 per share. The current short interest as a percentage of the float for DeVry stands at 11%. That means that out of the 56.53 million shares in the tradable float, 6.15 million shares are sold short by the bears.

From a technical perspective, DV is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently has been uptrending modestly for the last month, with shares moving higher from its low of $30.09 to its intraday high of $33.20 a share. That move is quickly pushing shares of DV within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on DV, 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 $33.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 855,000 shares. If that breakout triggers, then DV will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $42 a share.

I would avoid DV 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 at $30.98 a share and then below more support at $30.09 to $29.36 a share with high volume. If we get that move, then DV will set up to re-fill its previous gap up zone from February that started at around $25.50 a share.

Lumber Liquidators

My final earnings short-squeeze play today is Lumber Liquidators (LL), a retailer of hardwood flooring and accessories, which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lumber Liquidators to report revenue of $215.40 million on earnings of 42 cents per share.

The current short interest as a percentage of the float for Lumber Liquidators is very high at 17.9%. That means that out of the 25.94 million shares in the tradable float, 4.64 million shares are sold short by the bears. This is a low-float and high-short-interest situation. Any bullish earnings news from Lumber Liquidators could easily spark a monster short squeeze for the stock post-earnings.

From a technical perspective, LL 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, with shares moving higher from its low of $53.73 to its recent high of $71.72 a share. During that uptrend, shares of LL have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LL within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on LL, 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 $68.18 to $70.58 a share and then once it takes out more resistance at $71.72 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 671,000 shares. If that breakout triggers, then LL will set up to enter new 52-week high territory above $71.72, which is bullish technical price action. Some possible upside targets off that breakout are $80 to $83 a share.

I would simply avoid LL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $65.25 a share and then below some more key near-term support levels at $64.08 to $63.88 a share with high volume. If we get that move, then LL will set up to re-test or possibly take out 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 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.