Stock Quotes in this Article: AFFY, GEOY, HOGS, PSUN, FRAN

An earlier version of this story incorrectly stated Affymax's earnings estimates. We apologize for the error.

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces bullish results. When this happens, we often see 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 kicks off 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 trade 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 a stock is acting technically bullish and you have a strong conviction that it is going to rip higher.

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

 

Francesca’s

My first earnings short-squeeze trade candidate is retail player Francesca’s (FRAN), which is set to report its numbers on Tuesday after the market close. This company operates a national chain of retail boutiques designed and merchandised. Wall Street analysts, on average, expect Francesca’s to report revenue of $57.16 million on earnings of 16 cents per share.

If you’re looking for a heavily shorted stock that recently triggered a near-term breakout that’s trending strong heading into its report, then check out shares of Francesca’s. This stock broke out on Monday above some near-term overhead resistance at $24.63 a share, and its trading just a few points off its 52-week high of $29.75.

The current short interest as a percentage of the float for Francesca’s is pretty high at 12.6%. That means that out of the 25.7 million shares in the tradable float, 3.23 million shares are sold short by the bears. This is a low float high-short interest situation, so if the bulls get the news they’re looking for this stock could easily short-squeeze big.

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From a technical perspective, FRAN is currently trading above both its 50-day moving average, which is bullish. This stock has been uptrending strong since it found buying interest back in December at around $15.22 to $15.96 a share. During that uptrend, the stock has been mostly making higher lows and higher highs, which is bullish price action. Now the stock is breaking out above some near-term overhead resistance, and it’s within range of another big breakout.

If you’re bullish on FRAN, I would look for long-biased trades following its earnings if the stock takes out $27.06 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average of 384,392 shares. If we get that action, then look for FRAN to make a run at its all-time-high of $29.75 a share, and then potentially take that level out and trend higher.

I would avoid FRAN or look for short-biased trades if after its earnings report the stock fails to breakout and then drops below some near-term support at $24 to $23 a share with volume. If we get that action, I would target a drop back towards its 50-day moving average of $22.26 or possibly lower if the bears slam this stock post-earnings.

GeoEye

One potential earnings short-squeeze trade is business services player GeoEye (GEOY), which is set to report results on Tuesday after the market close. This is a commercial provider of earth imagery, and a provider of image-processing services and geospatial information services. Wall Street analysts, on average, expect GeoEye to report revenue of $89.88 million on earnings of 58 cents per share.

If you’re looking for a beaten-down heavily shorted stock heading into its earnings report, then make sure to take a strong look at shares of GeoEye. This stock has dropped big from its November high of $37.07 to its current price of just under $20 a share.

The current short interest as a percentage of the float for GeoEye is notable at 9.5%. That means that out of the 12.47 million shares in the tradable float, 1.64 million are sold short by the bears. This is a decent short interest on a stock with an extremely low tradable float. Any good news out of GeoEye could easily send this stock skyrocketing as the shorts cover some of their positions.

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From a technical perspective, GEOY is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock recently found some buying interest at $18.63 a share, which is very close to a big previous support zone at $18.04 to $17.98 a share. This could be signaling a near-term bottom where trades are no longer willing to sell shares as we approaching its earnings.

If you’re bullish on GEOY, I would look for long-biased trades after its earnings report if the stock holds above those key support levels at $18.63 to $17.98 a share. If those levels hold post-earnings, then look for GEOY to easily tag its 50-day moving average of $21.51 a share or much higher. Look for upside volume to track in that’s near of well above its three-month average action of 334,356 shares.

I would simply avoid GEOY or look for short-biased trades if this stock fails told those key support levels and then breaks below them with volume. If we get that action, I would look for some decent downside since they have acted as support for the last four months. The bottom line: Key off those levels for your earnings trades in GEOY.

Pacific Sunwear of California

Another earnings short-squeeze trade in retail complex is Pacific Sunwear of California (PSUN), which is set to release numbers on Tuesday after the market open. This is a specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. Wall Street analysts, on average, expect Pacific Sunwear of California to report revenue of $245.37 million on a loss of 22 cents per share.

If you’re looking for a penny stock that’s uptrending heading into its earnings report, then make sure to take a hard look at shares of Pacific Sunwear of California. This stock has rallied big off its October low of $1.11 to its current price of around $2.23 a share. That move now puts the stock within range of breaking out post-earnings.

The current short interest as a percentage of the float for Pacific Sunwear of California is rather high at 12.7%. That means that out of the 36.45 million shares in the tradable float, 5.82 million are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 5.3%, or by about 291,000 shares.

From a technical perspective, PSUN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past few months, with shares mostly making higher lows and higher highs, which is bullish price action.

If you’re bullish on PSUN, I would look for long-biased trades after its report if the stock manages to break out above some near-term overhead resistance at $2.28 to $2.43 a share with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 497,475 shares. If we get that action, I would target a run back towards its next significant overhead resistance level at around $3 to $3.16 a share or possibly higher.

I would simply avoid long-biased trades in PSUN after earnings if this stock fails to break out above $2.28 to $2.43 a share with volume.

I also featured Pacific Sunwear in "5 Stocks Under $5 Making Big Moves."

Affymax

Another earnings short-squeeze candidate is Affymax (AFFY), which is set to release numbers on Wednesday after the market close. This is a biopharmaceutical company developing drugs to improve the treatment of serious and often life-threatening conditions.

Recently, Citi Investment Research said that there is rising interest among dialysis clinics about its anemia treatment, which is being reviewed by regulators. As we approach its earnings report, this stock is trending very strong and trading about one point off its 52-week high of $11.50.

The current short interest as a percentage of the float for Affymax is notable at 9.1%. That means that out of the 30.36 million shares in the tradable float, 3.16 million shares are sold short by the bears. This is a decent short interest for a stock with a very low float. Any good news could easily spark a sizable short-squeeze.

From a technical perspective, AFFY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been basing, or trading sideways for the past few months between $11.50 and around $10 a share. A move outside of that sideways pattern should set this stock up for its next big trend.

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If you’re bullish on AFFY, I would look for long-biased trades after its earnings report if the stock manages to break out above $11.50 a share with high-volume. Look for volume on that move that’s close to or well above its three-month average action of 1,249,940 shares. If we get that high-volume breakout, then look for AFFY to spike large since it will enter a major gap down zone from back in 2010.

I would avoid AFFY or look for short-biased trades if after earnings the stock fails to break out and then drops below some near-term support at $10 a share with volume. I would target a drop back towards its 50-day moving average of $8.99 or possibly lower if the bears hammer this post-earnings.

Zhongpin

An earnings short-squeeze play in the food processing complex is Zhongpin (HOGS), which is set to release numbers on Tuesday after the market close. This is a holding company, principally engaged in the meat and food processing and distribution business in the People’s Republic of China. Wall Street analysts, on average, expect Zhongpin to report revenues of $410.30 million on earnings of 50 cents per share.

The current short interest as a percentage of the float for Zhongpin stands at 7.9%. That means that out of the 55.24 million shares in the tradable float, 14.87 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spike the stock off any bullish news.

From a technical perspective, HOGS is currently trading below its 50-day moving average and right at its 200-day moving average, which is neutral trendwise. This stock recently ran higher from $8.30 to a recent high of $12.50 a share. After hitting that high, the stock has started to form a bearish pattern of lower highs and lower lows, as shares fell from to its current price of $10.11 a share.

If you’re bullish on HOGS, I would look for long-biased trades after its report if the stock can manage to move back above its 50-day moving average of $10.73 a share with high-volume. Look for volume that registers close to or above its three-month average action of 224,702 shares. If we get that action, I would target a run in HOGS back towards $11.86 to $12.50 a share in the near-term.

I would simply avoid HOGS or look for short-biased trades after its report if the stock fails to move back above the 50-day and then takes out its 200-day at $9.91 a share with volume. Target a drop back toward $8.50 a share or possibly lower if HOGS breaks those key moving averages post-earnings with volume.

To see more potential earnings short squeeze plays, includingSTR Holdings (STRI), Endocyte (ECYT) and Penson Worldwide (PNSN), 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.