Stock Quotes in this Article: ILMN, NFLX, QCOR, UA, BNNY

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 timeframe 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. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you 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, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

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 scientific and technical instrument player Illumina (ILMN), which is set to report results on Tuesday after the market close. This company is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function. Wall Street analysts, on average, expect United Rentals to report revenue of $278.71 million on earnings of 36 cents per share.

Just this morning, Leerink upgraded shares of Illumina on expectations HiSeq demand may have normalized and consensus estimates are achievable. The firm raised its price target range for the stock to $54 to $56 from $46 to $50. The current short interest as a percentage of the float for Illumina is very high at 16.8%. That means that out of the 63.40 million shares in the tradable float, 11.84 million shares are sold short by the bears.

From a technical perspective, ILMN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently moved above its sideways trading pattern between $37.77 and $41.50 a share. That move has also pushed ILMN back above its 50-day moving average of $41.42 a share.

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If you’re bullish on ILMN, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $43.11 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,354,920 shares. If we get that move, then ILMN could possibly re-test and take out its May high of $46.69 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 below its 50-day at $41.42 and its 200-day at $40.33 a share with high volume. If we get that action, then ILMN could possibly re-test and take out its recent low at $37.77 a share.

Illumina shows up on a recent list of 5 Stocks Hedge Funds Have Been Buying.

Questcor Pharmaceuticals

Another potential earnings short-squeeze trade is biotechnology player Questcor Pharmaceuticals (QCOR), which is set to release its numbers on Tuesday after the market close. This company primary product is H.P. Acthar Gel, is an injectable drug that is approved by the U.S. Food and Drug Administration, for the treatment of 19 indications. Wall Street analysts, on average, expect Questcor Pharmaceuticals to report revenue of $108.91 million on earnings of 63 cents per share.

If you’re looking for a beaten-down heavily-shorted stock head into its earnings report this week, then make sure to take a strong look at shares of Questcor Pharmaceuticals. During the last month, this stock has dropped over 17% with shares falling from a high of $58.91 to a low of $41.60 a share.

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The current short interest as a percentage of the float for Questcor Pharmaceuticals is extremely high at 28.2%. That means that out of the 59.65 million shares in the tradable float, 16.63 million shares are sold short by the bears. If Questcor Pharmaceuticals can manage to report a solid quarter and give the bulls the news they’re looking for, then we could easily see a sharp rebound and short-squeeze develop.

From a technical perspective, QCOR is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. Following that massive selloff from earlier this month that took QCOR from over $58 to $41 a share, this stock has been trading range bound from $42 to $44.48 a share. A move outside of that range post-earnings will likely setup the next major trend for QCOR.

If you’re in the bull camp on QCOR, then I would wait until after they report earnings and look for long-biased trades if this stock breaks out above its 50-day moving average of $45.57, and then some more overhead resistance at $46.88 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2,563,550 shares. If we get that action, then QCOR could spike back towards $54 a share or possibly higher post-earnings.

I would simply avoid QCOR or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out its 200-day moving average of $40.81 a share with high volume. If we get that action, then QCOR could trend down towards $37 to $35 a share if the bears whack this lower post-earnings.

Annie’s

One potential earnings short-squeeze play in the consumer goods complex is Annie’s (BNNY), which is set to release numbers on Tuesday after the market close. This company is a natural and organic food company offering consumers products in packaged food categories. Wall Street analysts, on average, expect Annie’s to report revenue of $32.21 million on earnings of 12 cents per share.

This company came public back in late March, and the stock has been trading within a huge range between $32.66 and $45 a share since its IPO. The current short interest as a percentage of the float for Annie’s is very high at 15%. That means that out of the 6.2 million shares in the tradable float, 923,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 42%, or by about 273,000 shares.

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From a technical perspective, BNNY is currently trading above both its 50-day moving average, which is bullish. This stock has been moving within a shorter-term range for the past month, between $44.68 on the upside and $39.07 a share on the downside. A move above the upside of that range post-earnings could setup BNNY to trade into new all-time high territory.

If you’re bullish on BNNY, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $42.22 to $44.68 a share, and then its all-time high of $45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 183,557 shares. If we get that action, then BNNY could easily trade north of $50 a share post-earnings.

I would avoid BNNY or look for short-biased trades if it fails to trigger that breakout after earnings, and then takes out its 50-day moving average of $38.82 a share with heavy volume. If we get that move, then BNNY will like trade down towards $35 a share, or possibly lower if the bears hammer this stock post-earnings.

Netflix

One potential earnings short-squeeze trade is television and movie streaming player Netflix (NFLX), which is set to release numbers on Tuesday after the market close. This company is an Internet subscription service streaming television shows and movies. Netflix’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices. Wall Street analysts, on average, expect Netflix to report revenue of $888.90 million on earnings of 5 cents per share.

If you’re looking for beaten-down heavily shorted stock ahead of its earnings report this week, then make sure to check out shares of Netflix. This stock has been hammered by the sellers during the last three months, with the stock dropping over 20%. It was one of the 10 Worst-Performing S&P 500 Stocks in the Second Quarter.

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The current short interest as a percentage of the float for Netflix is extremely high at 23.6%. That means that out of the 54.18 million shares in the tradable float, 12.7 million shares are sold short by the bears. If Netflix can manage to deliver the numbers the bulls are looking for, then we could easily see a monster-squeeze setup post-earnings.

From a technical perspective, NFLX is currently trading above both its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at around $60.70 to $61.02 a share. Since marking that bottom, shares of NFLX have ripped back above its 50-day moving average with heavy volume, and hit a recent high of $86.65 a share.

If you’re in the bull camp on NFLX, then I would look for long-biased trades after earnings if this stock manages to break out above some near-term overhead resistance at $86.65, and then above its 200-day moving average of $90.51 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5,151,740 shares. If we get that move, then NFLX could easily re-test its next major overhead resistance level at $109.71 a share, or possibly trade even higher.

I would simply avoid NFLX or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below its 50-day moving average of $71.79 a share with high volume. If we get that action, then NFLX could re-test that double bottom area near $60 a share, or possibly trade even lower if the bears destroy this stock post-earrings.

Netflix also shows up on recent lists of 3 Stocks to Sell if They Crash on Earnings and 6 Sucker Stocks to Avoid at All Costs.

Under Armour

My final earnings short-squeeze trade idea today is sportswear apparel player Under Armour (UA), which is set to release numbers on Tuesday before the market open. This company is engaged in the development, marketing and distribution of apparel, footwear and accessories for men, women and youth. Wall Street analysts, on average, expect Under Armour to report revenue of $358.50 million on earnings of 5 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it’s coming off a quarter where it topped estimates by 2 cents, reporting earnings per share of 14 cents per share against mean estimates of 12 cents per share. Under Armour has averaged year-over-year revenue growth of 35.2% over the last four quarters.

The current short interest as a percentage of the float for Under Armour is notable at 8.1%. That means that out of the 77.72 million shares in the tradable float, 6.26 million are sold short by the bears. This is more than enough bears involved in the stock to spark a large short-squeeze if Under Armour can produce solid results and issue bullish forward guidance.

From a technical perspective, UA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a double top back in June at around $53.58 to $53.93 a share. Since marking that top, the stock went on to drop below its 50-day moving average of $48.61 a share and hit a low of $44.07 a share. Since hitting that low, UA has rebounded back above its 50-day moving average of $48.61 a share.

If you’re bullish on UA, then I would wait until after they report and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $50.92 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2,126,890 shares. If we get that action, then UA will have a great chance of re-testing and possibly taking out its recent high of $53.93 a share post-earnings.

I would simply avoid UA or look for short-biased trades if it fails to trigger that breakout, and then moves back below some near-term support at $47.33 a share with high volume If we get that move, then UA could easily re-test and possibly take out its 200-day moving average of $43.72 a share post-earnings.

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 stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.