Stock Quotes in this Article: CCL, FDS, MTN, RHT, SNX

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 time frame 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 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.

 

Synnex

My first earnings short-squeeze trade idea today is Synnex (SNX), which is set to release numbers on Tuesday after the market close. This company provides distribution and business process outsourcing services to resellers, retailers and original equipment manufacturers worldwide. Wall Street analysts, on average, expect Synnex to report revenue of $2.59 billion on earnings of 93 cents per share.

This stock has been uptrending decent heading into its report, with shares up around 15% so far in 2012. The current short interest as a percentage of the float for Synnex is rather high at 13.1%. That means that out of the 25.97 million shares in the tradable float, 3.46 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.9%, or by about 128,000 shares.

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From a technical perspective, SNX is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. During the last three months, this stock has been uptrending strong with shares rising from $32.41 to its recent high of $35.88 a share. During that move, shares of SNX have been consistently making higher lows, and higher highs, which is bullish technical price action. That move has pushed the stock within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on SNX, then I would wait until its report and look for long-biased trades if it manages to take out some near-term overhead resistance $35.88 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 189,405 shares. If that breakout triggers for SNX, then this stock will have a great chance of re-testing or possibly taking out its next major overhead resistance level at $38.80 a share.

I would simply avoid SNX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day moving average of $34.39 a share with heavy volume. If we get that move, then SNX will setup to re-test and possibly take out some previous support levels at $32.50 to $31.26 a share.

FactSet Research Systems

Another potential earnings short-squeeze play is FactSet Research Systems (FDS), which is set to release its numbers on Tuesday before the market open. This company provides integrated financial information and analytical applications to the global investment community. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $207.03 million on earnings of $1.06 per share.

FactSet has reported quarterly results that have topped Wall Street estimates for the last three quarters. During the last quarter, FactSet Research Systems reported a profit of $1.08 per share vs. Wall Street estimates of $1.04 per share.

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The current short interest as a percentage of the float for FactSet Research Systems is pretty high at 12.1%. That means that out of the 40.89 million shares in the tradable float, 4.95 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.3%, or by about 205,000 shares.

From a technical perspective, FDS is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out above some overhead resistance at $96.02 a share with decent volume. Following that breakout, shares of FDS have soared to its recent high of $104.81 a share. That move has now pushed FDS within range of breaking out above its 52-week high of $109.20 a share.

If you’re in the bull camp on FDS, then I would wait until after its report earnings and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $104.81 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 331,969 shares. If FDS can trigger that move, then this stock will setup to re-test or possibly take out its next major overhead resistance levels at $108.83 to $109.20 a share.

I would simply avoid FDS or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below some major near-term support at $100 a share with high volume. If we get that move, then FDS could easily plunge back down towards its 200-day moving average of $94.71 a share, or possibly even lower to $92 to $90 a share.

Carnival

Another earnings short-squeeze play is Carnival (CCL), which is set to release numbers on Tuesday before the market open. Carnival, which has a portfolio of recognized cruise brands and is a provider of cruises to all main vacation destinations. operates as a cruise and vacation company worldwide. Wall Street analysts, on average, expect Carnival to report revenue of $4.68 billion on earnings of $1.44 per share.

Just this morning, Susquehanna said that Carnival share price increase is ahead of its fundamentals. The firm thinks third-quarter yields will come in line with expectations and for year-over-year growth trends to continue to deteriorate in the fourth quarter. The firm kept a neutral rating on the stock with a $40 price target.

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The current short interest as a percentage of the float for Carnival sits at 5.1%. That means that out of the 565.76 million shares in the tradable float, 21.10 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spike the stock higher if we get a solid earnings report.

From a technical perspective, CCL is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the past three months, with shares soaring from a low of $31.42 to its recent high of $38.14 a share. During that uptrend, shares of CCL have consistently been making higher lows and higher highs, which is bullish technical price action. That move has now pushed CCL within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on CCL, then I would wait until after its report and look for long-biased trades if this stock can manage to take out some near-term overhead resistance levels at $38 to $38.14 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.5 million shares. If that breakout triggers for CCL, then this stock will setup to re-test or possibly take out its next major overhead resistance level at $40.09 a share.

I would avoid CCL or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some key near-term support levels at $36.50 to $36 a share with heavy volume. If we get that action, then look for CCL to re-test or possibly take out its 50-day moving average of $34.53 a share.

Red Hat

Another potential earnings short-squeeze trade is open source software solutions provider Red Hat (RHT), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Red Hat to report revenue of $322.12 million on earnings of 29 cents per share.

This stock has been uptrending very strong in 2012, with shares up over 35% so far on the year. That strong trend has shares of Red Hat trading just a few points off its 52-week high of $62.75 a share ahead of its earnings report.

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The current short interest as a percentage of the float for Red Hat sits at 3.1%. That means that out of the 191.99 million shares in the tradable float, 5.89 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.9%, or by about 670,000 shares. This isn’t a huge short interest, but it’s more than enough to spark a solid rally if RHT reports a solid quarter and issues bullish forward guidance.

From a technical perspective, RHT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months, with shares moving higher from $49.51 to its recent high of $60 a share. During that uptrend, shares of RHT have mostly made higher lows and higher highs, which is bullish technical price action. That move has now pushed RHT within range of triggering a near-term breakout trade.

If you’re in the bull camp on RHT, then I would wait until its earnings report and look for long-biased trades as long as its trending above its 50-day at $56.32, and then once It breaks out above $60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.95 million shares. If we get that breakout, then RHT will setup to re-test or possibly take out its next major overhead resistance level at $62.41 to $62.75 a share. Any move above $62.75 should be considered bullish technical action, since it will push RHT into new 52-week-high territory.

I would simply avoid RHT or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day moving average of $56.32 a share with high volume. If we get that move, then RHT will setup to re-test or possibly take out its 200-day moving average of $52.91 a share post-earnings.

Vail Resorts

My final earnings short-squeeze trade idea is mountain resort operator Vail Resorts (MTN), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Vail Resorts to report revenue of $107.18 million on a loss of $1.56 per share.

This stock has been uptrending fairly strong so far during 2012, with shares up around 25%. That strong trend has shares of Vail Resorts trading just a few points off it 52-week high of $56.99 ahead of its earnings report. The current short interest as a percentage of the float for Vail Resorts is rather high at 9.3%. That means that out of the 35.72 million shares in the tradable float, 3.34 million are sold short by the bears.

From a technical perspective, MTN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been ramping hard to the upside for the past five months, with shares soaring from a low of $39.94 to its recent high of $56.99 a share. During that sharp move higher, shares of MTN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed MTN within range of triggering a major breakout trade post-earnings.

If you’re bullish on MTN, then I would wait until after its report and look for long-biased trades if it can hold its trend above its 50-day at $51.80, and then break out above some near-term overhead resistance at $56.99 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 243,823 shares. If we get that action, then look for MTN to tag $60 a share or higher post-earnings.

I would simply avoid MTN or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day moving average of $51.80 a share with high volume. If we get that move, then MTN will setup to re-test or possibly take out its next major support levels at $48.56 to its 200-day moving average at $45.65 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.