Stock Quotes in this Article: ANF, SPLK, VEEV, VMEM, ZOES

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.

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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.

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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Veeva Systems

My first earnings short-squeeze play is cloud-based software solutions provider Veeva Systems (VEEV), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Veeva Systems to report revenue of $69.28 million on earnings of 7 cents per share.

The current short interest as a percentage of the float for Veeva Systems is extremely high at 32.4%. That means that out of the 37.24 million shares in the tradable float, 12.09 million shares are sold short by the bears. This is a huge short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set off a monster short-squeeze that sends the bears scrambling to cover some of their bets.

From a technical perspective, VEEV is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently spiked sharply higher back above its 50-day moving average with decent upside volume flows. That move has now pushed shares of VEEV within range of triggering a major breakout trade above some key near-term overhead resistance levels post-earnings.

If you're bullish on VEEV, 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 $24.80 to $25.08 a share and then above $26.34 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 998,267 shares. If that breakout hits post-earnings, then VEEV will set up to re-test or possibly take out its next major overhead resistance levels at $29.06 to $34 a share.

I would simply avoid VEEV 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 $23.89 a share with high volume. If we get that move, then VEEV will set up to re-test or possibly take out its next major support levels at $21.57 to $19.51 a share. Any high-volume move below those levels will then give VEEV a chance to tag its next major support levels at $18 to $17.11 a share.

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Zoes Kitchen

Another potential earnings short-squeeze trade idea is fast casual Mediterranean cuisine restaurants player Zoes Kitchen (ZOES), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Zoes Kitchen to report revenue $40.65 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Zoes Kitchen is extremely high at 33.5%. That means that out of the 8.61 million shares in the tradable float, 2.88 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 27.8%, or by about 627,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ZOES could easily explode sharply higher post-earnings as the shorts move to cover some of their trades.

From a technical perspective, ZOES is currently trending just below its 50-day moving average, which is bearish. This stock has trending sideways and consolidating for the last two months, with shares moving between $27.50 on the downside and $32.87 on the upside. Any high-volume move post-earnings above the upper-end of its recent could trigger a major breakout trade for shares of ZOES.

If you're in the bull camp on ZOES, 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 $32.82 to $32.87 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 399,333 shares. If that breakout gets set off post-earnings, then ZOES will set up to re-test or possibly take out its next major overhead resistance level at its all-time high of $35.59 a share. Any high-volume move above that level will then give ZOES a chance to tag or take out $40 a share.

I would simply avoid ZOES 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 $30.11 to $28 a share with high volume. If we get that move, then ZOES will set up to re-test or possibly take out its next major support levels at $27.50 to $25.79 a share. Any high-volume move below those levels will then set up ZOES to trend below $24 a share.

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Violin Memory

Another potential earnings short-squeeze candidate is memory-based storage systems player Violin Memory (VMEM), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Violin Memory to report revenue of $19.06 million on a loss of 22 cents per share.

The current short interest as a percentage of the float for Violin Memory is notable at 7.4%. That means that out of the 77.39 million shares in the tradable float, 5.76 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of VMEM could easily rip sharply higher post-earnings as the shorts rush to get out of some of their positions.

From a technical perspective, VMEM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern at $3.62 to $3.60 a share. Since forming that bottom, shares of VMEM have started to uptrend and move within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on VMEM, 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 $4.01 to just above $4.20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 848,184 shares. If that breakout materializes post-earnings, then VMEM will set up to re-test or possibly take out its next major overhead resistance levels at $4.68 to $5.48 a share.

I would avoid VMEM or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below those double bottom support levels at $3.62 to $3.60 a share with high volume. If we get that move, then VMEM will set up to re-test or possibly take out its next major support levels at $3.27 to $3.04 a share.

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Abercrombie & Fitch

Another earnings short-squeeze prospect is casual apparel specialty retailer Abercrombie & Fitch (ANF), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Abercrombie & Fitch to report revenue of $909.22 million on earnings of 11 cents per share.

The current short interest as a percentage of the float for Abercrombie & Fitch is extremely high at 23%. That means that out of the 71.56 million shares in the tradable float, 16.46 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 1.48 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of ANF could easily spike sharply higher post-earnings as the shorts jump to cover some of their positions.

From a technical perspective, ANF is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last month, with shares moving higher from its low of $37.48 to its intraday high of $44.46 a share. During that uptrend, shares of ANF have been consistently making higher lows and higher highs, which is bullish technical price action.

If you're bullish on ANF, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new 52-week high above $44.46 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that registers near or above its three-month average action of 1.85 million shares. If that breakout triggers post-earnings, then ANF will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $52 to $54 a share, or even $60 a share.

I would simply avoid ANF or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average of $41.39 a share to some near-term support at $40.02 a share with high volume. If we get that move, then ANF will set up to re-test or possibly take out its next major support levels at $37.48 to $34.35 a share.

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Splunk

My final earnings short-squeeze play is real-time operational intelligence software solutions providerSplunk (SPLK), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Splunk to report revenue of $93.93 million on a loss of 2 cents per share.

The current short interest as a percentage of the float for Splunk is notable at 5.6%. That means that out of the 107.70 million shares in the tradable float, 6.03 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, SPLK is currently trending below both its 50-day and 200-day moving averages, which is bearish This stock recently formed a double bottom chart pattern at $40.71 to $40.90 a share. Following that bottom, shares of SPLK have started to uptrend and break out above some near-term overhead resistance at $44.44 a share. That move is quickly pushing shares of SPLK within range of triggering another big breakout trade post-earnings.

If you're in the bull camp on SPLK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $47.37 a share and then above more near-term resistance at $50.97 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3 million shares. If that breakout develops post-earnings, then SPLK will set up to re-test or possibly take out its next major overhead resistance levels at $56.63 to $57.60 a share, or even its 200-day moving average of $62.82 a share.

I would avoid SPLK or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below those double bottom support levels at $40.90 to $40.71 a share and then below its 52-week low of $39.35 a share with high volume. If we get that move, then SPLK will set up to enter new 52-week-low territory, which is bearish technical price action.

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.