Stock Quotes in this Article: AFFX, AKAM, MITK, SCSS, SNCR

 WINDERMERE, Fla. (Stockpickr) -- With quarterly earnings season in full swing on Wall Street, it’s time for market-players to create a powerful watch list of stocks due to report numbers that also sport a decent short interest.

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.

>>5 Rocket Stocks to Buy for February

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 you have a strong conviction that the stock is going to rip higher, and its acting technically bullish.

Here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

 

Mitek Systems

My first earnings short-squeeze trade idea is software player Mitek Systems (MITK), which is set to report its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Mitek Systems to report revenues of $3.51 million on earnings of 1 cent per share.

If you’re looking for a small-cap stock that’s trading very close to some near-term breakout levels, then make sure to take a hard look at shares of Mitek Systems. This stock has been trading within a range for the last month or so between $9.30 and $8.15 a share. A move outside of that range should setup this stock for its next big trend.

>>5 Small-Cap Growth Stocks With Zero Debt

The current short interest as a percentage of the float for Mitek Systems is pretty high at 13.5%. That means that out of the 19.94 million shares in the tradable float, 2.76 million shares are sold short by the bears. The float is very small here, and the short interest is high. This situation sets up the stock for a powerful short squeeze if the company can deliver bullish results and guidance.

From a technical perspective, MITK is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock was drilled lower from its October high of $12.50 to a recent low of $6.54 a share. After hitting that low, the stock has rebounded and started to trend higher towards its current price of $8.70 a share.

If you’re bullish on MITK, I would look for long biased trades following their report if the stock takes out $9.30 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average of 494,790 shares. If that level gets taken out with volume, I would then look add to any long positions once MITK takes out $10.50 with volume. Target a run toward $11.50 to $12.50 a share if the bulls control this stock post-earnings.

I would only get short or avoid MITK if after earnings the stock fails to break out and then drops back below $8.42 and $7.92 with volume. I would target a drop back toward $7 to $6.50 a share, or possibly much lower if the bears smack this stock lower post-earnings.

Akamai

Another earnings short-squeeze candidate is Akamai (AKAM), which is set to release numbers on Wednesday after the close. This company provides services for accelerating and improving the delivery of content and applications over the Internet in the U.S. and internationally. Wall Street analysts, on average, expect Akamai to report revenue of $311.26 million on earnings of 40 cents per share.

For the last four quarters, Akamai has registered double-digit year-over-year percentage revenue growth. The highest growth was seen in the fourth quarter of last year at 19.5%, and the average growth was 14.6%. The company’s net income has trended higher for three straight quarters.

The current short interest as a percentage of the float for Akamai is decent at 4.7%. That means that out of the 174.09 million shares in the tradable float, 8.16 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by about 424,000 shares.

From a technical perspective, AKAM is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending very strong to the upside since it hit a low in October at $18.25 to its current price of just over $33 a share. This strong uptrend has now setup AKAM for a big breakout trade post-earnings if the company can deliver a strong quarter and bullish guidance.

If you’re bullish on AKAM, I would wait until after they report earnings and the stock if it manages to break out above $34.24 to $35.83 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 4,221,240 shares. If we get that high-volume breakout, then I would look for AKAM to fill a major gap down in price from last May that started at over $40 a share.

I would only get short or avoid AKAM after earnings if it fails to break out and then trades below 31 to $30.45 (50-day) on high-volume. Target a drop back towards its 200-day moving average of $28.18 a share, or possibly much lower if the bears do a number on this name post-earnings.

Akamai shows up on a list of 21 Stock Picks That Experts Agree On.

Synchronoss Technologies

An earnings short-squeeze trade candidate is software and programming player Synchronoss Technologies (SNCR), which is set to release numbers on Tuesday after the market close. This company is a provider of multi-channel transaction management solutions to the communications services and digital content marketplaces. Wall Street analysts, on average, expect Synchronoss Technologies to report revenue of $61.55 million on earnings of 23 cents per share.

During the last quarter, this company improved gross margins by 4.8% and revenue rose 33.3%, while its costs of sales rose by 20.9% to $27.8 million. Overall, it met Wall Street estimates, so market players will be looking for beat this quarter.

The current short interest as a percentage of the float for Synchronoss Technologies is extremely high at 18.7%. That means that out of the 23.74 million shares in the tradable float, 5.22 million are sold short by the bears. This is a very high short interest and low float situation that can spark a giant short-squeeze if the company can deliver what he bulls are looking for.

From a technical perspective, SNCR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock found big buying support a few months ago at around $27 to $27.58 a share, and since then it has soared to its current price of $34 a share. This monster uptrend puts SNCR within range of a major breakout post-earnings if the company can deliver strong earnings and bullish guidance.

If you’re bullish on SNCR, wait until after earnings and buy the stock once it takes out $35.72 to $35.90 with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 308,102 shares. If we get that action, I would look for SNCR to challenge its 2007 highs near the low-to-mid-$40s.

I would avoid any long trades or short SNCR after earnings if the stock fails to break out and then drops below some near-term support at $33 a share on heavy volume. I would target a drop back towards its 50-day moving average of $30.86 a share, or possibly much lower if the bears hammer this stock down post-earnings.

Synchronoss is one of Goldman Sach's Top Tech Stocks for 2012.

Affymetrix

An earnings short-squeeze play in the scientific and technical instrument complex is Affymetrix (AFFX), which is set to release numbers on Wednesday after the market close. This company develops, manufactures and sells products and services for genetic analysis to the life science research and clinical healthcare markets. Wall Street analysts, on average, expect Affymetrix to report revenue of $65.63 million on a loss of 7 cents per share.

If you’re looking for a small-cap stock that’s trading within range of a near-term breakout heading into earnings this week, then take a strong look at shares of Affymetrix. Not just is this stock within range of a near-term breakout, but if that breakout were to trigger, the stock has little overhead resistance until $7 a share.

>>5 Stocks Under $10 Poised for Big Upside

The current short interest as a percentage of the float for Affymetrix is notable at 9.7%. That means that out of the 56.13 million shares in the tradable float, 6.07 million are sold short by the bears. This is once again a low float and heavily shorted stock, so any bullish price action post-earnings should send this screaming to the upside.

From a technical perspective, AFFX is currently trading above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock dropped from its October high of $5.95 to a recent low of $3.68 a share. After printing that low, the stock has rebounded sharply towards its current price of $5.18 a share.

If you’re bullish on AFFX, I would wait until after its report and buy the stock once it triggers a near-term breakout above $5.25 to $5.44 (200-day) a share with high volume. Look for volume that’s tracking in close to or above its three-month average volume of 863,097 shares. If we get that action, I would then add to any long positions if AFFX takes out $5.95 a share with volume. A move over $5.95 will set this stock up to re-test $7 a share, or possibly get into that big gap down in price from last July that started near $8.

I would simply avoid any long-biased trades in AFFX if it fails to break out over its 200-day moving average at $5.44 with big volume following earnings. I don’t love the downside potential in AFFX for any short trades, but it could drop back towards its 50-day at $4.39 if they disappoint the street with their earnings and guidance.

Select Comfort

Another potential earnings short-squeeze trade is bed manufacturer and retailer Select Comfort (SCSS), which is set to report results on Wednesday after the market close. Wall Street analysts, on average, expect Select Comfort to report revenues of $177.50 million on earnings of 22 cents per share.

Back on Dec. 20, I wrote about Select Comfort in "5 Stocks Setting Up to Break Out," and since then, the stock has ripped higher from $21 to its recent 52-week high of $28.05 a share. That momentum could easily continue if Select Comfort can report a strong quarter and squeeze the shorts even more.

The current short interest as a percentage of the float for Select Comfort is rather high at 10.9%. That means that out of the 50.44 million shares in the tradable float, 5.55 million are sold short by the bears. This stock has a pretty low float and high short interest, so a decent quarter should spark a sizable short-squeeze. Whenever a stock has a low float and high short interest, any potential short-squeeze becomes amplified since the supply and demand issue for shares can be thrown off balanced rapidly.

From a technical perspective, SCSS is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock has been in a monster uptrend for the last number of months, after shares found big buying support at around $17.78 to $18.58 a share. Since those buyers stepped in, SCSS went on to break out over $22.19 and continue its uptrend. Now the stock is within range of breaking out again to all-time highs if it can take out $28.05 post-earnings.

If you’re bullish on SCSS, I would wait until after it reports its results and buy the stock once it breaks out above its 52-week high of $28.05 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of around 1 million shares. If we get that high-volume breakout, then I would look for a 10% to 15% move higher in SCSS post-earnings, since this stock is so heavily shorted.

I would simply avoid any long trades in SCSS or get short if this stock fails to take out its 52-week highs post-earnings, and then drops below some near-term support at $25 a share on big volume. If we get that action, then I would target a drop back towards $23 to $22.16 (50-day) a share, or possibly lower if the bears hammer this down post-earnings.

To see more potential earnings short squeeze plays, includingOraSure Technologies (OSUR), ValueClick (VCLK) and Silicon Graphics (SGI), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

RELATED LINKS:

>>7 Dividend Stocks Paying More Cash in 2012
>>5 Stocks Insiders Are Loading Up On

>>7 Relative Strength Stocks to Beat the Market

Follow Stockpickr on Twitter and become a fan on Facebook.

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.