Stock Quotes in this Article: BIG, DSW, FRED, OVTI, TFM

MADISON, 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.

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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Fred's

My first earnings short-squeeze trade idea is retail discount stores and full-service pharmacies operator Fred's (FRED), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Fred's to report revenue of $499.41 million on earnings of 27 cents per share.

The current short interest as a percentage of the float for Fred's is pretty high at 10.5%. That means that out of the 34.25 million shares in the tradable float, 3.55 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then FRED could rip higher post-earnings as the bears rush to cover some of their bets.

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From a technical perspective, FRED 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 five months, with shares soaring higher from its low of $12.24 to its recent high of $15.69 a share. During that uptrend, shares of FRED have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FRED within range of triggering a near-term breakout trade post-earnings.

If you're bullish on FRED, 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 $15.98 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 157,016 shares. If that breakout triggers, then FRED will set up to re-test or possibly take out its next major overhead resistance levels at $20 to $23 a share.

I would simply avoid FRED 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 $14.77 to its 50-day moving average at $14.32 a share with high volume. If we get that move, then FRED will set up to re-test or possibly take out its next major support levels at its 200-day moving average at $13.66 to $13.25 a share.

OmniVision Technologies

Another potential earnings short-squeeze play is image-sensing device maker OmniVision Technologies (OVTI), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect OmniVision Technologies to report revenue of $318.26 million on earnings of 21 cents per share.

During the last quarter, this company reported revenue of $423.5 million, and GAAP reported sales were much higher than the prior-quarter's $185.2 million.

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The current short interest as a percentage of the float for OmniVision Technologies is pretty high at 14.6%. That means that out of the 53.48 million shares in the tradable float, 8.05 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low float. Any bullish earnings news could easily send shares of OVTI sharply higher post-earning.

From a technical perspective, OVTI 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 its low of $12.06 to its intraday high of $14.75 a share. During that uptrend, shares of OVTI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has started to push shares of OVTI into its previous gap down zone from March that started at $15.88 a share.

If you're in the bull camp on OVTI, 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 $15.88 to $16.30 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 932,262 shares. If that breakout triggers, then OVTI will set up to re-test or possibly take out its next major overhead resistance levels at $17.85 to $20 a share. Any high-volume move above $21.11 will then put a previous gap down zone into play from late 2011 that started at $26.50 a share.

I would simply avoid OVTI 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 $13.64 a share with high volume. If we get that move, then OVTI will set up to re-test or possibly take out its next major support levels at $12.50 to $12.06 a share.

Big Lots

Another potential earnings short-squeeze candidate is closeout retailer Big Lots (BIG), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Big Lots to report revenue of $1.32 billion on earnings of 61 cents per share.

The current short interest as a percentage of the float for Big Lots is pretty high at 12.3%. That means that out of the 49.70 million shares in the tradable float, 7.85 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 send shares of BIG spiking higher post-earnings.

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From a technical perspective, BIG 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 five months, with shares moving higher from its low of $27.52 to its recent high of $39.22 a share. During that uptrend, shares of BIG have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BIG within range of triggering a near-term breakout trade post-earnings.

If you're bullish on BIG, 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 $39.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 789,269 shares. If we get that breakout, then BIG will set up to re-test or possibly take out its next major overhead resistance levels at $42.26 to $46 a share.

I would avoid BIG 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 $36.42 a share with high volume. If we get that move, then BIG will set up to re-test or possibly take out its next major support levels at $33.76 to its 200-day moving average at $32.46 a share.

Fresh Market

Another earnings short-squeeze prospect is specialty grocery retailer Fresh Market (TFM), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Fresh Market to report revenue of $369.69 million on earnings of 44 cents per share.

The current short interest as a percentage of the float for Fresh Market is notable at 8.6%. That means that out of the 40.05 million shares in the tradable float, 3.53 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. If Fresh Market can give the bulls the earnings news they're looking for, then this stock could easily experience a solid short-squeeze post-earnings.

From a technical perspective, TFM is currently trending above its 50-day moving average and 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 its low of $38.95 to its intraday high of $47.33 a share. During that uptrend, shares of TFM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TFM within range of triggering a near-term breakout trade post-earnings.

If you're bullish on TFM, 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 $48 to $49.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 779,711 shares. If that breakout triggers, then TFM will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average at $50.47 to $51.10 a share. Any move above $51.10 will then put $55 to $57 a share into range for shares of TFM.

I would avoid TFM 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 $45 a share with high volume. If we get that move, then TFM will set up to re-test or possibly take out its next major support levels at $42.85 to its 50-day moving average at $42.31 a share.

DSW

My final earnings short-squeeze play is specialty retailer of branded footwear and accessories DSW (DSW), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect DSW to report revenue of $588.81 million on earnings of 90 cents per share.

This company has topped Wall Street estimates three times in the past four quarters. The current short interest as a percentage of the float for DSW stands at 6.6%. That means that out of the 34.94 million shares in the tradable float, 2.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.3%, or by about 137,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of DSW could easily rip higher post-earnings.

From a technical perspective, DSW 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, with shares moving higher from its low of $63.15 to its recent high of $70.78 a share. During that uptrend, shares of DSW have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DSW 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 if this stock manages to break out above some near-term overhead resistance at $70.78 a share and then once it takes out its 52-week high at $72 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 497,553 shares. If that breakout triggers, then DSW will set up to enter new 52-week-high territory above $72, which is bullish technical price action. Some possible upside targets off that move are $75 to $80 a share, or even north of $80 a share.

I would simply avoid DSW 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 $68 a share with high volume. If we get that move, then DSW will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $65.98 a share to its 200-day moving average at $65.41 a share. Any high-volume move below those levels will then put its next major support level at $63.15 into focus for shares of DSW.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Madison, Wis. 

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, 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.