Stock Quotes in this Article: FOSL, MYGN, TRAK, XONE, INSY

DELAFIELD, Wis. (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 Wall 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 for a heavily shorted stock and then jump in and trade the prevailing trend.

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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.

Insys Therapeutics

My first earnings short-squeeze play is commercial-stage specialty pharmaceutical player Insys Therapeutics (INSY), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Insys Therapeutics to report revenue of $52.77 million on earnings of 30 cents per share.

The current short interest as a percentage of the float for Insys Therapeutics is extremely high at 53.8%. That means that out of the 9.92 million shares in the tradable float, 5.34 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily kick off a monster short-covering rally for shares INSY post-earnings.

From a technical perspective, INSY is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $22.85 to $22.52 a share. Following that bottom, shares of INSY have started to spike sharply higher and it's quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.

If you're bullish on INSY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at its 200-day moving average of $32.88 a share to more resistance at $33.65 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 691,995 shares. If that breakout his post-earnings, then INSY will set up to re-test or possibly take out its next major overhead resistance levels at $40 to $43, or even $45 a share.

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I would simply avoid INSY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $27.71 a share with high volume. If we get that move, then INSY will set up to re-test or possibly take out its next major support levels at $25 to $22.52 a share, or even $20.52 a share.

ExOne

Another potential earnings short-squeeze trade idea is three dimensional printing player ExOne (XONE), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect ExOne to report revenue $12.11 million on a loss of 14 cents per share.

The current short interest as a percentage of the float for ExOne is extremely high at 48.3%. That means that out of the 7.87 million shares in the tradable float, 3.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.5%, or by about 265,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of XONE could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, XONE is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock is just starting to spike higher right above some key near-term support at $28.85 a share. That move is starting to push shares of XONE within range of triggering a near-term breakout trade post-earnings above some key overhead resistance levels.

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If you're in the bull camp on XONE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $33.49 to $37.15 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 528,216 shares. If that breakout gets started post-earnings, then XONE will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $42.52 a share to $48.66 a share.

I would simply avoid XONE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $28.85 to $27.15 a share with high volume. If we get that move, then XONE will set up to re-test or possibly take out its next major support levels at $25.05 to its 52-week low at $24.34 a share. Any high-volume move below $24.34 will then push shares of XONE into new 52-week-low territory, which is bearish technical price action.

Myriad Genetics

Another potential earnings short-squeeze candidate is molecular diagnostics player Myriad Genetics (MYGN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Myriad Genetics to report revenue of $187.68 million on earnings of 45 cents per share.

The current short interest as a percentage of the float for Myriad Genetics is extremely high at 49.6%. That means that out of the 74.50 million shares in the tradable float, 36.98 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of MYGN could easily explode sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, MYGN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is just starting to spike higher right off its 50-day moving average of $36.97 a share. This spike is starting to push shares of MYGN within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on MYGN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $40.50 to $41.64 a share and then above its 52-week high at $42.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 944,948 shares. If that breakout materializes post-earnings, then MYGN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $50 to $55 a share.

I would avoid MYGN or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average at $36.97 a share to some more key support at $35.56 a share with high volume. If we get that move, then MYGN will set up to re-test or possibly take out its next major support levels at $33.40 to $32.25 a share, or even $30 a share.

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Dealertrack Technologies

Another earnings short-squeeze prospect is Web-based software solutions and services player Dealertrack Technologies (TRAK), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Dealertrack Technologies to report revenue of $213.45 million on earnings of 37 cents per share.

The current short interest as a percentage of the float for Dealertrack Technologies is pretty high at 11.7%. That means that out of the 49.53 million shares in the tradable float, 5.81 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by about 308,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of TRAK could easily spike sharply higher post-earnings as the shorts move quick to cover some of their trades.

From a technical perspective, TRAK is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways for the last month, with shares moving between $36.43 on the downside and $39.22 on the upside. Any high-volume move above the upper-end of its sideways trading pattern post-earnings could trigger a big breakout trade for shares of TRAK.

If you're bullish on TRAK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $39.22 a share to its 50-day moving average of $40.93 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 618,156 shares. If that breakout kicks off post-earnings, then TRAK will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $44.59 a share to $46.30 to $48.00 a share.

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I would simply avoid TRAK or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support at its 52-week low of $36.43 a share with high volume. If we get that move, then TRAK will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $30 to $27.50 a share.

Fossil Group

My final earnings short-squeeze trade idea is consumer fashion accessories player Fossil Group (FOSL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Fossil Group to report revenue of $771.01 million on earnings of 96 cents per share.

The current short interest as a percentage of the float for Fossil Group is notable at 7.1%. That means that out of the 43.45 million shares in the tradable float, 3.10 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 24.1%, or by about 2.50 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of FOSL could easily surge sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, FSOL is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $97.29 to its recent high of $104.51 a share. During that move, shares of FOSL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FOSL within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on FSOL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $104.51 to $108.08 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 677,394 shares. If that breakout develops post-earnings, then FOSL will set up to re-test or possibly take out its next major overhead resistance levels at $114 to $117.50, or even $120 to $125 a share.

I would avoid FSOL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $100 to $97.29 a share with high volume. If we get that move, then FOSL will set up to re-test or possibly take out its next major support levels at $90 to $89.50 a share, or even $85 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 Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com.

You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.