Stock Quotes in this Article: AUXL, CRUS, ENTR, OCLR, THRX

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.

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.

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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.

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.

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

 

 

Theravance

My first earnings short-squeeze trade idea this week is biotechnology and drugs player Theravance (THRX), which is set to report results on Tuesday after the market close. This company is focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas, including respiratory disease, bacterial infections, and central nervous system pain. Wall Street analysts, on average, expect Theravance to report revenue of $1.97 million on a loss of 44 cents per share.

If you’re looking for a strong uptrending heavily-shorted biotechnology stock heading into its earnings report this week, then make sure to check out shares of Theravance. This stock has soared over 35% so far in 2012, and it's currently trading just two points off its 52-week high of $31.87 a share.

The current short interest as a percentage of the float for Theravance is extremely high at 16.2%. That means that out of the 47.33 million shares in the tradable float, 9.37 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 5.6%, or by about 499,000 shares. If Theravance can deliver bullish results, we could see a large short-squeeze develop since the bears are pressing their bets into the quarter.

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From a technical perspective, THRX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock triggered a major breakout back in June, when it took out some past overhead resistance at $22.93 to $24.29 a share with massive volume. Since triggering that breakout, shares of THRX have soared to its 52-week high of $31.87 a share. That move has now pushed THRX within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on THRX, then I would wait until after earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $30.72 to $31.87 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 599,376 shares. If we get that action, then THRX will enter new 52-week-high territory, and the stock could easily trade north of $35 a share.

I would simply avoid THRX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major near-term support levels at $29.03 to $28 a share with high volume. If we get that action, then THRX could trend lower toward $25 to $24 a share if the bears hammer this stock down post-earnings.

Cirrus Logic

Another earnings short-squeeze play is semiconductor player Cirrus Logic (CRUS), which is set to release its numbers on Monday after the market close. This company develops analog and mixed-signal integrated circuits for a range of audio and energy markets. Wall Street analysts, on average, expect Cirrus Logic to report revenue of $100.94 million on earnings of 21 cents per share.

This company has met or beat Wall Street’s bottom-line earnings estimates in three of the last four quarters. Just this morning, Canaccord Genuity issued a new buy rating on the stock with a $35 a share price target. The firm said Cirrus Logic is leveraged to new product release at Apple (AAPL).

The current short interest as a percentage of the float for Cirrus Logic is rather high at 13.9%. That means that out of the 64.06 million shares in the tradable float, 8.86 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.4%, or by about 688,000 shares. If the bears are caught leaning too hard into a solid quarter for Cirrus Logic, then we could easily see a monster short-squeeze setup post-earnings.

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From a technical perspective CRUS is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending pretty strong for the last three months, with shares making mostly higher lows and higher highs, which is bullish price action. Shares of CRUS have recently traded back above its 50-day moving average of $27.92 a share, and its quickly moving within range of triggering a major breakout trade.

If you’re in the bull camp on CRUS, then I would wait until after they report and look for long-biased trades if this stock triggers a break out above some near-term overhead resistance levels at $30.22 to $31.23 a share with heavy volume. Look for volume on that move that clocks in close to or above its three-month average action of 2,525,680 shares. If we get that move, then CRUS will have a great chance of trading north of $35 a share.

I would simply avoid CRUS or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below its 50-day moving average of $27.92 a share with high volume. If we get that action, then CRUS will likely re-test and possibly take out its next significant support levels at $24.94 to $24.44 a share post-earnings.

Auxilium Pharmaceuticals

One potential earnings short-squeeze trade in the biotechnology and drugs complex is Auxilium Pharmaceuticals (AUXL), which is set to release numbers on Tuesday before the market open. This company is focused on developing and marketing products to predominantly specialist audiences. Wall Street analysts, on average, expect Auxilium Pharmaceuticals to report revenue of $73.97 million on a loss of 6 cents per share.

Another strong uptrending and heavily-shorted biotechnology stock to put on your trading radar this week heading into its earnings report is shares of Auxilium Pharmaceuticals. This stock is up over 30% so far in 2012, and it's currently trading around two points off its 52-week high of $27.89 a share.

The current short interest as a percentage of the float for Auxilium Pharmaceuticals is notable at 8.6%. That means that out of the 37.69 million shares in the tradable float, 4.09 million shares are sold short by the bears. This is a decent amount of bears involved in a stock with a relatively small float. Any bullish earnings news out of Auxilium and we could easily see a solid short-squeeze develop post-earnings.

From a technical perspective, AUXL is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock triggered a major breakout in June once it took out some overhead resistance at $19.63 to $21.25 a share with monster volume. Following that breakout, shares of AUXL skyrocketed to its recent 52-week high of $27.89 a share. That move has now pushed the stock within range of triggering a near-term breakout trade post-earnings.

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If you’re bullish on AUXL, then I would wait until after they report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $26.95 to $27.25 a share, and then its 52-week high of $27.89 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 695,379 shares. If we get that move, then look for AUXL to trade north of $30 a share if the bulls gain full control of this stock post-earnings.

I would avoid AUXL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major near-term support levels at $25.45 to $25.42 a share, and then its 50-day moving average of $23.94 a share with heavy volume. If we get that action, then AUXL could easily trade down towards $21 a share, or possibly lower if bears whack this stock down post-earnings.

Entropic Communications

One possible earnings short-squeeze trade in the semiconductor complex is Entropic Communications (ENTR), which is set to release numbers on Wednesday after the market close. This company designs, develops and markets systems solutions to enable connected home entertainment. Wall Street analysts, on average, expect Entropic Communications to report revenue of $79.41 million on earnings of 8 cents per share.

If you’re looking for a heavily-shorted small cap technology stock heading into its earnings report this week, then make sure to check out shares of Entropic Communications. This stock has been on fire during the last three months, with shares soaring over 40%. Despite that monster move, shares of Entropic are still trading well off its 52-week high of $7.38 a share ahead of its quarter.

The current short interest as a percentage of the float for Entropic Communications is pretty high at 13.3%. That means that out of the 87.99 million shares in the tradable float, 11.11 million shares are sold short by the bears.

From a technical perspective, ENTR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock gapped up big in late June from around $4 to over $5 a share with monster volume. Following that move, shares of ENTR have started to trend sideways between $5.50 and $5.98 a share. A move outside of that range post-earnings will likely setup ENTR for its next major trend.

If you’re in the bull camp on ENTR, then I would look for long-biased trades after earnings if this stock manages to trigger a near-term break out above overhead resistance at $5.98 to $6.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.1 million shares. If we get that move, then ENTR could re-test and possibly take out its next major overhead resistance levels at $7.25 to $7.38 a share.

I would simply avoid ENTR or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below some near-term support at $5.43 to $5.40 a share, and then below its 200-day moving average of $5.26 a share with high volume. If we see that move, then ENTR could fill that previous gap and possibly trade down toward $4 a share.

Oclaro

My final earnings short-squeeze play today is communications equipment player Oclaro (OCLR), which is set to release numbers on Tuesday after the market close. This company is a provider of core optical network components, modules and subsystems to global telecommunications equipment manufacturers. Wall Street analysts, on average, expect Oclaro to report revenue of $105.73 million on a loss of 15 cents per share.

During the last quarter, Oclaro reported revenue of $88.7 million, but GAAP reported sales were 23% lower than the prior quarter’s of $115.7 million. This stock has been beaten-down during the last six months, with shares plunging by over 35%. That sharp move lower could be setting up OCLR for a rebound and possibly short-squeeze trade post-earnings.

The current short interest as a percentage of the float for Oclaro is rather high 16.5%. That means that out of the 50.72 million shares in the tradable float, 8.42 million are sold short by the bears. This is a very high short interest on a stock with a relatively low float. Any bullish earnings news out of Oclaro and we could see a solid short-covering rally post-earnings.

From a technical perspective, OCLR is currently trading above its 50-day moving average, and below its 200-day moving average, which is neutral trendwise. This stock was destroyed by the sellers back in late March, when it fell from $4.97 to its May low of $2.11 a share. During that move, shares of OCLR were making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to mark a bottom during that last three months as buyers have moved in at around $2.11 to $2.21 a share.

If you’re bullish on OCLR, then I would wait until after they report earnings and look for long-biased trades if it can manage to trigger a breakout trade above some near-term overhead resistance at $2.83, and then above more resistance $3.10 to $3.15 a share with high volume. If we get that action, then OCLR will have a great chance of re-testing and possibly taking out its 200-day moving average at $3.42 a share.

I would simply avoid OCLR after earnings if this stock fails to trigger that breakout, and then moves back below its 50-day moving average of $2.61 a share, and more support at $2.47 a share with heavy volume. If we get that action, then OCLR will likely re-test those recent lows at $2.21 to $2.11 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 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.