Stock Quotes in this Article: OVTI, RLD, SAI, ASNA, VRA

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.

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

OmniVision Technologies

My first earnings short-squeeze play today is semiconductor player OmniVision Technologies (OVTI), which is set to release its numbers on Thursday after the market close. This company designs, develops and markets semiconductor image-sensor devices. Wall Street analysts, on average, expect OmniVision Technologies to report revenue of $205.34 million on earnings of 22 cents per share.

If you’re looking for a beaten-down heavily shorted technology stock ahead of its earnings report this week, then make sure to take a hard look at shares of OmniVision Technologies. This stock has dropped notably from its April high of $21.11 to its closing price on Tuesday of $15.40 a share. That slide has pushed shares of OmniVision Technologies into oversold territory since its relative strength index reading has dipped around 30 to 40 for the last couple of weeks.

The current short interest as a percentage of the float OmniVision Technologies is rather high at 15.8%. That means that out of the 46.47 million shares in the tradable float, 8.18 million shares are sold short by the bears. This is a low float and high short-interest situation, so if the company can report bullish earnings and forward guidance, then we could easily see a sizable short squeeze post-earnings.

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From a technical perspective, OVTI is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending since April, with shares falling from $21.11 to a recent low of $14.02 a share. During that downtrend, shares of OVTI have consistently made lower highs and lower lows, which is bearish technical price action. That said, on Monday OVTI closed up 8.5% to $15.40 on heavy volume.

If you’re in the bull camp on OVTI, I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $15.72, and then its 200-day moving average of $16.26 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 2,591,920 shares. If we get that action, I would then add to any long positions once OVTI takes out its 50-day moving average of $18.16 a share with high-volume. Target a run toward $20 to $21 a share or possibly higher if the bulls spark a big short-squeeze post-earnings.

I would simply avoid OVTI or look for short-biased trades if after earnings this stock fails to trade back above its 50-day moving average at $16.26, and then drops below some near-term support at $14.02 a share with heavy volume. If we get that move, then look for OVTI to drop significantly down towards $12 to $11 a share if the bears hammer this down post-earnings.

RealD

Another potential earnings short-squeeze trade is 3D motion picture technology player RealD (RLD), which is set to report results on Wednesday after the market close. This company is a global licensor of 3D technologies. This company licenses its RealD Cinema Systems to motion picture exhibitors that show 3D motion pictures and alternative 3D content. Wall Street analysts, on average, expect RealD to report revenue of $46.98 million on a loss of 7 cents per share.

This company has topped Wall Street estimates for the last four quarters and its coming off a quarter where it beat estimates by 11 cents, after reporting a profit of 5 cents per share vs. forecasts of a net loss of 6 cents per share. During the third quarter, RealD swung to a profit of $2.8 million or 5 cents per share vs. a loss of $16.6 million or 34 cents per share from a year earlier. Revenue dropped 15.2% to $49 million from $57.8 million in the same quarter a year ago.

The current short interest as a percentage of the float for RealD is pretty high at 12.2%. That means that out of the 43.96 million shares in the tradable float, 5.31 million shares are sold short by the bears. This is more than enough shorts on a stock with a reasonably low float to spark a sizeable short-squeeze post-earnings, if RealD can deliver the numbers the bulls are looking for.

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From a technical perspective, RLD is currently trading above its 200-day moving average, and just a few cents below its 50-day moving average, which is neutral trendwise. This stock recently bounced hard off its 200-day moving average of $11.05 with above average volume. That bounce has now pushed RLD within range of triggering a major breakout trade post-earnings.

If you’re bullish on RLD, I would wait until after it releases earnings and look for long-biased trades if this stock can trigger a break out above its 50-day moving average of $11.94, and then above some near-term overhead resistance at $12.20 to $12.59 a share with high-volume. Look for volume on that move that hits close to or above its three-month average volume of 389,533 shares. If we get that action, then look for RLD to re-test and potentially take out its March high of $13.55 a share.

I would simply avoid RLD or look for short-biased trades if after earnings it fails to sustain a trend back above its 50-day at $11.94, and then drops below some major near-term support at $10.61 a share with high-volume. If we get that action, then RLD could easily drop down towards $9.50 to $8 a share if the bears spark a large selloff post-earnings.

SAIC

Another potential earnings short-squeeze play is SAIC (SAI), which is set to release numbers on Thursday after the market close. This is a provider of scientific, engineering, systems integration, and technical services and solutions to agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security, other civil agencies, state and local government agencies, foreign governments, and customers in commercial markets. Wall Street analysts, on average, expect SAIC to report revenue of $2.69 billion on earnings of 33 cents per share.

On Tuesday, shares of SAIC closed up 4.3% to $11.08 on heavy volume after Raymond James upgraded the stock, saying that shares have declined too much and buybacks or asset sales could help it rise. The firm upgraded the stock to outperform from market perform and slapped a $14 price target on the shares. Raymond James said the stock feels too cheap, trading at a 13% discount to government-information technology firms, even though it has better fundamentals.

The current short interest as a percentage of the float for SAIC is notable at 2.7%. That means that out of the 281.49 million shares in the tradable float, 7.25 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.9%, or by about 652,000 shares. This is far from a huge short interest, but if the bears are leaning too hard into this quarter with their recent adds, then it could see a decent short squeeze off bullish numbers.

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From a technical perspective, SAI is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has plunged since it hit its March high of $14.06 to a recent low of $10.30 a share. During that sharp drop, shares of SAI have consistently made lower highs and lower lows, which is bearish technical price action. That said, SAI has now started to bounce off oversold conditions since its relative strength index reading was well below 30 for the past couple of weeks.

If you’re bullish on SAI, then I would wait until after its report and look for long-biased trades if this stock can manage to trigger a near-term break out above some overhead resistance at $11.29 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 2,708,990 shares. If we get that move, look for SAI to potentially trade back above its 50-day at $12 and its 200-day at $12.41 a share post-earnings.

I would avoid SAI or look for short-biased trades if the stock fails to trigger that breakout above $11.29, and then drops below some major near-term support at $10.30 a share with high-volume. If we get that action, then look for SAI to drop 10% to 15% if the bears hammer this stock lower post-earnings.

Vera Bradley

One earnings short-squeeze trade idea in the apparel and accessories complex is Vera Bradley (VRA), which is set to release numbers on Thursday after the market close. This company is a designer, producer, marketer, and retailer of functional accessories for women. Wall Street analysts, on average, expect Vera Bradley to report revenue of $116.83 million on earnings of 29 cents per share.

If you’re looking for a heavily-shorted beaten-down stock ahead of its earnings report this week, then make sure to check out shares of Vera Bradley. This stock has plunged 33% in the last six months, and shares are currently trading just a few points above its 52-week low of $21.29 a share.

That severe beat-down inspired Baird to release some notes on the stock Tuesday, saying that Vera Bradley remains an under-appreciated retail growth story and anticipating first-quarter results to be a positive catalyst. The firm remains positive on the company’s growth prospects, attractive category position, and potential for multiple expansion.

The current short interest as a percentage of the float for Vera Bradley is extremely high at 47.9%. That means that out of the 14.48 million shares in the tradable float, 9.62 million are sold short by the bears. This stock could easily experience a monster short-squeeze post-earnings, since it’s so heavily-shorted and the float is so extremely small. All the bulls will need is a solid number and bullish guidance to spark a big-time short-covering rally.

From a technical perspective, VRA is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been destroyed by the bears in the last three months, with shares downtrending hard from a high of $39.48 to a recent low of $21.29 a share. During that sharp move lower, shares of VRA have consistently made lower highs and lower lows, which is bearish technical price action. That said, the stock has bounced recently from $21.29 to $25.04 a share off oversold conditions, since its relative strength index reading was under 30 before that bounce.

If you’re bullish on VRA, I would look for long-biased trades after they report if this stock manages to break out above some near-term overhead resistance at $25.04 to $27.93 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 966,653 shares. If we get that action, then VRA will be solidly back above its 50-day moving average of $27.07 a share, and the stock will have a great chance of hitting $30 or higher post-earnings.

I would simply avoid VRA or look for short-biased trades if the stock fails to trigger that move, and then drops below some near-term support at $22 to $21.29 a share with high volume. If we get that action, then look for VRA to easily drop below $20 a share and trend significantly lower if the bears pressure the stock down post-earnings.

Ascena Retail Group

My final earnings short-squeeze play today is specialty retailer of apparel for women and tween girls Ascena Retail Group (ASNA), which is set to release numbers on Thursday after the market close. This is a national specialty retailer operating, through its wholly owned subsidiaries, the dressbarn, maurices, and Justice brands. Wall Street analysts, on average, expect Ascena Retail Group to report revenue of $786.70 million on earnings of 36 cents per share.

If you’re looking for a specialty retailer stock that’s been uptrending strong heading into its earnings report this week, then make sure to take a hard look at shares of Ascena Retail Group. This stock has ripped higher in 2012 with shares up over 27% to its current price of $18.92 a share, which is just a few points off its 52-week high of $22.62.

The current short interest as a percentage of the float for Ascena Retail Group sits at 6.4%. That means that out of the 122.02 million shares in the tradable float, 7.92 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.1%, or by about 792,000 shares.

From a technical perspective, ASNA is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently ran into heavy selling resistance at around $22 to $22.62, and has since then dropped back below its 50-day moving average of $20.90 a share. That said, ASNA has recently found some buying support at around $18.99 to $18.91 a share on a closing basis. I say closing because during intraday trading on Tuesday ASNA hit $18.65 a share.

If you’re in the bull camp on ASNA, I would wait until after its report and look for long-biased trades if this stock can manage to hold above $18.99 to $18.65 a share and then trade above some near-term overhead resistance at $19.54 a share with high-volume. Look for volume on that move that hits close to or above its three-month average volume of 2,021,520 shares. If we get that move, then I would look to add to any long positions once ASNA takes out its 50-day at $20.90 and then its 52-week high of $22.62 a share.

I would simply avoid ASNA or look for short-biased trades if after its report the stock takes out those near-term support levels at $18.99 to $18.65 a share with heavy volume. If we get that action, then this stock should easily re-test its 200-day moving average of $16.87 a share, or possibly trend much lower if the bears spark a big-time selloff 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.