Stock Quotes in this Article: DRI, KMX, PIR, RAD, TIBX

 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.

>>5 Stocks Poised to Break Out

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.

>>5 Rocket Stocks Worth Buying This Week

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.

>>5 Big Trades for a Ping-Pong Market

Pier 1 Imports

My first earnings short-squeeze play is specialty retailer of decorative home furnishings and gifts Pier 1 Imports (PIR), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $395.02 million on earnings of 19 cents per share.

>>5 Buy Signals From the Consumer Sector

Just recently, Wedbush analysts Joan Storms and John Garret said they think sales momentum is strong for Pier 1 Imports and it reiterated its outperform rating on the stock. The analysts said they believe Pier 1 continues to outpace the competition and that its solid merchandize, store enhancements, improved online presence and other efforts, should improve for its fiscal first quarter.

The current short interest as a percentage of the float for Pier 1 Imports is notable at 6.4%. That means that out of the 89.88 million shares in the tradable float, 5.97 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of PIR could rip sharply higher post-earnings.

From a technical perspective, PIR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last few weeks, with shares moving higher from its low of $22.76 to its recent high of $24.74 a share. During that move, shares of PIR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PIR within range of triggering a near-term breakout trade post-earnings.

If you're bullish on PIR, 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 $24.74 to its 52-week high at $25.29 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.28 million shares. If that breakout triggers, then PIR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $30 to $35 a share.

I would simply avoid PIR 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 $23.58 a share and then below more key support at $22.76 a share with high volume. If we get that move, then PIR will set up to re-test or possibly take out its next major support level at its 200-day moving average at $21.34 a share.

Rite Aid

Another potential earnings short-squeeze trade is retail drugstore chain in the U.S. Rite Aid (RAD), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.27 billion on earnings of 9 cents per share.

>>3 Big Stocks on Traders' Radars

The current short interest as a percentage of the float for Rite Aid sits at 4.5%. That means that out of the 785.26 million shares in the tradable float, 42.18 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a sharp short-covering rally if Rite Aid delivers the earnings news the bulls are looking for.

From a technical perspective, RAD 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 six months, with shares soaring higher from its low of $1.26 to its recent high of $3.21 a share. During that uptrend, shares of RAD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RAD within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on RAD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $3.21 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 21.89 million shares. If that breakout triggers, then RAD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $4 to $5 a share.

I would simply avoid RAD or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back some key near-term support levels at $2.97 to $2.83 a share with high volume. If we get that move, then RAD will set up to re-test or possibly take out its next major support levels at its 50-day moving average at $2.67 a share to $2.50 a share. Any high-volume move below $2.50 will then set up RAD to trend back towards $2 a share.

CarMax

One potential earnings short-squeeze candidate is retailer of used cars CarMax (KMX), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $3.13 billion on earnings of 58 cents per share.

>>5 Hated Earnings Stocks That Deserve Your Love

The current short interest as a percentage of the float for CarMax stands at 4.6%. That means that out of the 223.19 million shares in the tradable float, 10.31 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to kickoff a sharp short-squeeze if CarMax delivers the news the bulls are looking for.

From a technical perspective, KMX 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 and change, with shares soaring higher from its low of $37.81 to its recent high of $48.86 a share. During that move, shares of KMX have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KMX within range of triggering a near-term breakout trade post-earnings.

If you're bullish on KMX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above $47.56 a share and then once it clears its 52-week high at $48.86 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.60 million shares. If we get that breakout, then KMX will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $58 a share.

I would avoid KMX 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 $45.86 a share and then below more key near-term support at $45.37 a share with high volume. If we get that move, then KMX will set up to re-test or possibly take out its next major support levels at $43 to $41 a share.

Tibco Software

Another earnings short-squeeze prospect is provider of middleware and infrastructure software Tibco Software (TIBX), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Tibco Software to report revenue of $246.55 million on earnings of 18 cents per share.

>>5 Stocks Under $10 Set to Soar

Just recently, Wells Fargo upgraded shares of Tibco ahead of the company's earnings report on its belief valuation and estimates are near trough levels. The firm raised its price target range for the stock to $24 to $26 from $22 to $24.

The current short interest as a percentage of the float for Tibco Software sits at 3.5%. That means that out of the 151.30 million shares in the tradable float, 5.35 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 48.1%, or by about 1.73 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of TIBX could rip sharply higher post-earnings.

From a technical perspective, TIBX is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently pulled back and re-tested its 50-day moving average at $20.54 a share and the stock has so far held that level. Shares of TIBX are now starting to trend within range of triggering a near-term breakout trade post-earnings.

If you're bullish on TIBX, 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 $22.03 to its 50-day at $23.51 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.31 million shares. If that breakout hits, then TIBX will set up to re-test or possibly take out its next major overhead resistance levels at $24.02 to $24.77 a share. Any high-volume move above those levels will then put $26 to $27 into range for shares of TIBX.

I would avoid TIBX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $20.54 a share with high volume. If we get that move, then TIBX will set up to re-test or possibly take out its next major support levels $19 to its 52-week low at $18.18 a share. Any high-volume move below its $18.18 will then put $16 to $14 a share into range for shares of TIBX.

Darden Restaurants

My final earnings short-squeeze trade idea is full-service restaurant player Darden Restaurants (DRI), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $2.26 billion on earnings of $1.04 per share.

>>5 Cash-Rich Stocks to Triple Your Gains

During the last quarter, this company reported revenue of $2.26 billion and GAAP reported sales were 4.6% higher than the prior-year quarter's $2.16 billion. Also during the last quarter, EPS registered $1.02 and GAAP EPS was $1.02, which was 18% lower than the prior-year quarter's $1.25 per share.

The current short interest as a percentage of the float for Darden Restaurants is notable at 5.5%. That means that out of the 128.76 million shares in the tradable float, 7.04 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of DRI could easily rip sharply higher post-earnings.

From a technical perspective, DRI 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 two months, with shares moving between $51 a share on the downside and $55.25 a share on the upside. A high-volume move above the upper-end of its recent range could trigger a big breakout trade for shares of DRI post-earnings.

If you're in the bull camp on DRI, 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 $55.25 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.41 million shares. If we get that breakout, then DRI will set up to re-test or possibly take out its 52-week high at $57.93 a share. Any high-volume move above that level will then give DRI a chance to trend north of $60 a share.

I would avoid DRI or look for short-biased trades if after earnings it fails to trigger that move, and then drops below some near-term support levels at its 50-day of $52.06 a share and then below more key support at $52.08 to $51.79 a share with high volume. If we get that move, then DRI will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $49.73 a share to $48.25 a share. Any high-volume move below $48.25 will then give DRI a chance to trend down towards $46 to $44 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 Madison, Wis.

RELATED LINKS:

>>5 Sin Stocks to Play Defense
>>10 Tips for Trading Penny Stocks

>>5 Stocks With Big Insider Buying

Follow Stockpickr on Twitter and become a fan on Facebook.

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.