Stock Quotes in this Article: ILMN, JAKK, NFLX, TRIP, NOW

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.

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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.

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.

Illumina

My first earnings short-squeeze trade idea is Illumina (ILMN), a developer and manufacturer of life science tools and integrated systems, which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Illumina to report revenue of $343.56 million on earnings of 40 cents per share.

The current short interest as a percentage of the float Illumina is very large at 18.9%. That means that out of the 123.32 million shares in the tradable float, 23.31 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of ILMN could soar sharply higher post-earnings as the bears rush to cover some of their short positions.

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From a technical perspective, ILMN 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 few weeks, with shares moving higher from its low of $72.77 to its recent high of $83.50 a share. During that uptrend, shares of ILMN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ILMN within range of triggering a big breakout trade post-earnings.

If you're bullish on ILMN, 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 $83.50 to its 52-week high at $85.81 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 952,865 shares. If that breakout hits, then ILMN will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $95 to $100 a share.

I would simply avoid ILMN 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 $80.09 a share with high volume. If we get that move, then ILMN will set up to re-test or possibly take out its next major support levels at $76 to $72.77 a share.

Netflix

Another potential earnings short-squeeze play is Netflix (NFLX), an Internet subscription service provider of streaming television shows and movies, which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Netflix to report revenue $1.10 billion on earnings of 49 cents per share.

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The current short interest as a percentage of the float for Netflix is pretty high at 12.5%. That means that out of the 52.18 million shares in the tradable float, 6.96 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a monster short-squeeze for shares of NFLX post-earnings.

From a technical perspective, NFLX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending incredibly strong over the last four months and change, with shares soaring higher from its low of $205.75 to its intraday high of $349. During that uptrend, shares of NFLX have been mostly making higher lows and higher highs, which is bullish technical price action.

If you're in the bull camp on NFLX, then I would wait until after its report and look for long-biased trades if this manages to break out above its new 52-week high of $349 a share high volume. Look for volume on that move that hits near or above its three-month average action of 3.13 million shares. If that breakout triggers, then NFLX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $380 to $400 a share.

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 Monday's low of $340.10 a share with high volume. If we get that move, then NFLX will set up to re-test or possibly take out its next major support levels at $320 to $310 a share. Any high-volume move below those levels will then give NFLX a chance to tag its 50-day moving average of $298.44 a share.

Jakks Pacific

Another potential earnings short-squeeze candidate is toy and electronics maker Jakks Pacific (JAKK), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Jakks Pacific to report revenue of $297.88 million on earnings of $1.05 per share.

Just recently, B. Riley initiated shares of Jakks Pacific with a neutral rating and a price target of $4.50 per share.

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The current short interest as a percentage of the float for Jakks Pacific is extremely high at 35.2%. That means that out of the 16.80 million shares in the tradable float, 6.06 million shares are sold short by the bears. This is a high short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of JAKK post-earnings.

From a technical perspective, JAKK is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months and change, with shares plunging lower from its high of $11.75 to its recent low of $4.45 a share. During that move, shares of JAKK have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of JAKK have started to reverse that trend during the last month, and the stock is now moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on JAKK, 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 $5 to $5.27 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 637,282 shares. If that breakout hits, then JAKK will set up to re-test or possibly take out its next major overhead resistance levels at $5.68 to $6 a share. Any high-volume move above those levels will then give JAKK a chance to tag $7 to $8 a share.

I would avoid JAKK or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below some key near-term support levels at $4.68 to $4.51 a share and the below its 52-week low at $4.45 a share. If we get that move, then JAKK will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $4 to $3.50 a share.

ServiceNow

Another earnings short-squeeze prospect is cloud-based services provider ServiceNow (NOW), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect ServiceNow to report revenue of $105.33 million on a loss of 2 cents per share.

Just recently, UBS said it expects ServiceNow to growth at least 20% faster than its competitors in 2014, and the firm expects the stock to continue to outperform as its cloud offerings are adopted by many more companies. The firm has an outperform rating on the stock and it raised its price target to $62 from $50.

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The current short interest as a percentage of the float for ServiceNow stands at 5.3%. That means that out of the 119.61 million shares in the tradable float, 6.28 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally for shares of NOW post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, NOW is currently trending just above its 50-day moving average and well below its 200-day moving average, which is bullish. This stock has been uptrending strong for the last five months, with shares soaring higher from its low of $35.21 to its recent high of $55.46 a share. During that uptrend, shares of NOW have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of NOW within range of triggering a big breakout trade post-earnings.

If you're bullish on NOW, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high at $55.46 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.50 million shares. If that breakout hits, then NOW will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.

I would simply avoid NOW 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 to its 50-day moving average of $49.02 a share with high volume. If we get that move, then NOW will set up to re-test or possibly take out its next major support levels at $46 to $42 a share.

TripAdvisor

My final earnings short-squeeze play is online travel research player TripAdvisor (TRIP), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect TripAdvisor to report revenue of $257.97 million on earnings of 45 cents per share.

The current short interest as a percentage of the float for TripAdvisor is very high at 15%. That means that out of the 111.67 million shares in the tradable float, 16.71 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of TRIP could rip sharply higher post-earning as the bears rush to cover some of their bets.

From a technical perspective, TRIP is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has uptrending modestly for the last month, with shares moving higher from its low of $68.11 to its recent high of $75.43 a share. During that move, shares of TRIP have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TRIP within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on TRIP, 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 its 50-day moving average of $74.02 a share to more resistance at $75.43 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.82 million shares. If that breakout hits, then TRIP will set up to re-test or possibly take out its next major overhead resistance levels at $79.89 a share to its 52-week high at $82.19 a share. Any high-volume move above those levels will then give TRIP a chance to tag $85 to $90 a share.

I would avoid TRIP 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 $71.60 to $68.11 a share with high volume. If we get that move, then TRIP will set up to re-test or possibly take out its next major support levels at $62.50 to its 200-day moving average of $60.03 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 Delafield, Wis.


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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.