Stock Quotes in this Article: ARUN, CYBX, GME, PETM, P

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.

>>5 Toxic Stocks You Should Sell

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.

>>5 Stocks Poised for Breakouts

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.

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.

>>5 Dividend Stocks That Want to Pay You More

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Pandora Media

My first earnings short-squeeze play is Internet radio player Pandora Media (P), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Pandora Media to report revenue of $156.24 million on earnings of 2 cents per share.

>>4 Big Tech Stocks on Traders' Radars

Just recently, Needham raised its price target for Pandora Media to $25 from $20 to reflect its 2015 estimates for the company. The firm keeps a buy rating on the stock and expects Pandora Media to see rapid margin expansion in its core streaming business. The firm also cited the company's revenue potential from its service being included in more automobile models.

The current short interest as a percentage of the float for Pandora Media is extremely high at 16.2%. That means that out of the 137.89 million shares in the tradable float, 26.24 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of P could easily explode higher post-earnings.

From a technical perspective, P 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 $11.48 to its recent high of $21.98 a share. During that uptrend, shares of P have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of P within range of triggering a major breakout trade post-earnings.

If you're bullish on P, 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 $21.98 a share (or above Thursday's intraday high if greater) with high volume. Look for volume on that move that registers near or above its three-month average action of 6.97 million shares. If that breakout hits, then P will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are its all-time high at $26 to even well north of $30 a share.

I would simply avoid P 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 $19.70 a share with high volume. If we get that move, then P will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $18.27 to $17.65 a share. Any high-volume move below those levels will then put $15 to $14 into range for shares of P.

Aruba Networks

Another potential earnings short-squeeze play is provider of next-generation network access solutions for mobile enterprise networks Aruba Networks (ARUN), which is set to release its numbers Thursday after the market close. Wall Street analysts, on average, expect Aruba Networks to report revenue of $149.33 million on earnings of 11 cents per share.

>>5 Tech Stocks Spiking on Big Volume

The current short interest as a percentage of the float for Aruba Networks is very high at 11%. That means that out of the 108.80 million shares in the tradable float, 11.79 million shares are sold short by the bears.

From a technical perspective, ARUN 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 three months, with shares soaring higher from its low of $12.38 to its recent high of $19.16 a share. During that uptrend, shares of ARUN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ARUN within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on ARUN, 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 $191.6 to its 200-day moving average of $19.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.72 million shares. If that breakout hits, then ARUN will set up to re-fill some of its previous gap down zone from May that started near $22. If $22 gets taken out with volume, then ARUN could easily tag $24 to $26 a share.

I would simply avoid ARUN 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 $17.79 to its 50-day moving average at $16.81 a share with high volume. If we get that move, then ARUN will set up to re-test or possibly take out its next major support levels at $15.55 to $14 a share.

PetSmart

One potential earnings short-squeeze candidate is supplier of products, services and solutions for the lifetime needs of pets PetSmart (PETM), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect PetSmart to report revenue of $1.71 billion on earnings of 86 cents per share.

Over the last four quarters, this company's income has jumped 34% on average year-over-year. The biggest jump came in the third quarter, when income increased 47% from the year-ago quarter. PetSmart's revenue has risen for two straight quarters. In the first quarter, revenue rose 6% to $1.71 billion from the year earlier quarter. In the fourth quarter, revenue jumped 15%.

>>5 Rocket Stocks to Buy Now

The current short interest as a percentage of the float for PetSmart is pretty high at 8.3%. That means that out of the 95.16 million shares in the tradable float, 8.54 million shares are sold short by the bears. If PetSmart can report a strong quarter and issue the type of guidance that Wall Street is looking for, then this stock has the potential for a decent short squeeze to develop post-earnings.

From a technical perspective, PETM 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 and changes, with shares moving higher from its low of $65.22 to its recent high of $75 a share. During that uptrend, shares of PETM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PETM within range of triggering a near-term breakout trade post-earnings.

If you're bullish 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 52-week high of $75 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 1.09 million shares. If that breakout triggers, then PETM will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $85 to $95 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 some key near-term support at $73 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 level at its 50-day moving average of $70.91 a share. If that level gets taken out with volume, then PETM will set up to tag its 200-day moving average at $67.66 a share.

GameStop

Another earnings short-squeeze prospect is multichannel video game retailer GameStop (GME), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect GameStop to report revenue of $1.36 billion on earnings of 4 cents per share.

>>5 Must-See Charts to Trade for Gains

Just recently, RW Baird raised its price target on GameStop to $50 from $38 ahead of second-quarter earnings. The firm cited key milestones expected in the second half of the year, including next-generation gaming consoles.

The current short interest as a percentage of the float for GameStop is extremely high at 21.5%. That means that out of the 114.97 million shares in the tradable float, 24.74 million shares are sold short by the bears. This is a huge short interest, so any bullish earnings news could easily spark a monster short-squeeze for shares of GME post-earnings.

From a technical perspective, GME 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 powering higher from its low of $23.17 to its recent high of $51.36 a share. During that uptrend, shares of GME have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GME within range of triggering a near-term breakout trade post-earnings.

If you're bullish on GME, 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 $49.66 to its 52-week high at $51.36 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.45 million shares. If that breakout triggers, then GME will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share, or even $70 a share.

I would avoid GME 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 $47.04 a share with high volume. If we get that move, then GME will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $43.92 a share to $40 a share.

Cyberonics

My final earnings short-squeeze play is medical device player Cyberonics (CYBX), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Cyberonics to report revenue of $67.80 million on earnings of 46 cents per share.

>>5 Earnings Stocks Everyone Hates -- but You Should Love

The current short interest as a percentage of the float for Cyberonics is very high at 10.3%. That means that out of the 22.46 million shares in the tradable float, 2.74 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-squeeze for shares of CYBX post-earnings.

From a technical perspective, CYBX 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 moving higher from its low of $42.49 to its recent high of $55 a share. During that uptrend, shares of CYBX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CYBX within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on CYBX, 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 $54 to $55 a share and then once it clears its 52-week high at $56.73 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 281,678 shares. If that breakout triggers, then CYBX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $75 a share.

I would avoid CYBX 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 $52.02 a share with high volume. If we get that move, then CYBX will set up to re-test or possibly take out its next major support levels at $50.36 to its 200-day moving average at $49.04 a share. Any high-volume move below its 200-day will then put $47 to $45 within range for shares of CYBX.

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.

RELATED LINKS:

>>4 Stocks to Profit From the Bounce
>>5 Stocks Under $10 Set to Soar

>>3 Big Retail Stocks to Trade (or Not)

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 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.