Stock Quotes in this Article: AA, ADTN, RAD, SVU, TITN

 WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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.

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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. 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.

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

Alcoa

My first earnings short-squeeze idea is metal mining player Alcoa (AA), which is set to release its numbers on Tuesday after the market close. This company engages in the production and management of primary aluminum, fabricated aluminum and alumina. Wall Street analysts, on average, expect Alcoa to report revenue of $5.77 billion on a loss of 4 cents per share.

During the past three quarters, Alcoa’s quarterly results have fallen short of Wall Street estimates. Last quarter, the company reported a loss of 3 cents per share vs. estimates for profit of one cent per share. Alcoa is hoping to report a profit this quarter, which would rebound from a loss last quarter that snapped a streak of profits. The company reported a profit of $380 million in the first quarter of the last fiscal year, $322 million in the second quarter and $172 million in the third quarter before dropping to a loss in the fourth quarter.

The current short interest as a percentage of the float for Alcoa stands at 7.1%. That means that out of the 1.07 billion shares in the tradable float, 75.66 million shares are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 5.9%, or by about 4.18 million shares. If the bears are caught leaning too strong into this quarter, then we could get a solid short-covering rally.

From a technical perspective, AA is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been trading range bound for the past month, between $10.75 and $9.45 a share. A move outside of that range post-earnings will likely set up the next big trend for AA.

If you like the look of AA here, I would wait until after its report and look for long-biased trades if this stock moves back above its 50-day moving average at $10.20 and then breaks out above some near-term resistance at $10.24 a share with high volume. Look for volume that registers close to or above the three-month average action of 25.7 million shares. If we get that action, then look for AA to make a run at its 200-day moving average of $11.05 a share or possibly much higher.

I would simply avoid AA or look for short-biased trades if after earnings it fails to move back above its 50-day moving average and then drops below $9.45 a share with heavy volume. Target a drop back toward $9 to $8.50 a share or possibly lower if the bears hammer this down post-earnings.

Alcoa, one of 6 Stocks Driving the Economy in 2012, was also featured in "5 Big Stocks to Trade for Gains."

Titan Machinery

One earnings short-squeeze play in the construction services complex is Titan Machinery (TITN), which is set to report results on Wednesday before the market open. This company owns and operates a network of full service agricultural and construction equipment stores in the U.S. Wall Street analysts, on average, expect Titan Machinery to report revenue of $433.26 million on earnings of 52 cents per share.

This stock showed up on my eight stocks rising on unusual volume list on Monday, after Robert W. Baird upgraded the stock and raised its price target, citing improving business and acquisitions. The Baird analyst said that Titan’s agricultural business will likely top his forecast on warmer weather, anticipated acreage growth and better equipment pricing. The analyst is also upbeat on Titan’s four acquisitions during the first quarter, which the analyst said have added $55 million in annual revenue.

The current short interest as a percentage of the float for Titan Machinery is rather high at 8.8%. That means that out of the 16 million shares in the tradable float, 1.48 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.1%, or by about 136,000 shares. The bears might be leaning dangerously too hard into this quarter, since the stock is trading just a few points off its 52-week high of $32.03 a share.

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From a technical perspective, TITN is currently trading above both its 50-day and 200-day moving averages , which is bullish. This stock has uptrending extremely strong for the past six months, with shares rising from a low of $18.50 to its current price of $29.10 a share. During that uptrend, the stock has consistently made higher lows and higher highs, which is bullish price action. That move has now pushed TITN within range of triggering a major breakout trade post-earnings.

 

If you’re bullish on TITN, I would wait until after its report and look for long-biased trades if the stock triggers a breakout above some past overhead resistance at $30.97 to $32.02 a share high-volume. Look for volume on that move that registers near or well above its three-month average action of 186,397 shares. If we get that action, then look for TITN to spike big towards $35 a share or possibly higher if the bulls can spark a notable short-squeeze.

I would simply avoid TITN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below its 50-day moving average of $26.60 a share with high-volume. If we get that move, then look for TITN to drop back toward its 200-day moving average of $24.04 a share or possibly lower if the bears whack this stock lower post-earnings.

Adtran

Another potential earnings short-squeeze trade idea in the communications equipment space is Adtran (ADTN), which is set to release numbers on Wednesday after the market close. This company designs, manufactures, markets and services network access solutions for communications networks. Wall Street analysts, on average, expect Adtran to report revenue of $134.26 million on earnings of 20 cents per share.

If you’re looking for a beaten-down heavily shorted name that reports earnings this week, then make sure to check out shares of Adtran. This stock has dropped from its February high of $38.95 to its current price of $28.76 a share. That recent slide has pushed shares of Adtran into oversold territory since its current RSI reading is 28.6. Oversold can always get more oversold, but it’s also a great place to look for a strong rebound if the stock starts to show price strength.

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The current short interest as a percentage of the float for Adtran is rather high at 10.2%. That means that out of the 63.60 million shares in the tradable float, 6.05 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9%, or by about 501,000 shares. If the bears are caught leaning too short into the stock’s recent decline, then we could easily see a snapback short-covering rally kickoff.

From a technical perspective, ADTN is currently trading well below both its 50-day and 200-day moving averages, which is bearish. This stock topped out in late February at $38.95, and since then it has plunged to recent low hit Monday at $28.50 a share. That steep drop has now pushed the stock near some major previous support levels at around $27.64 to $27 a share. This stock is

If you’re a bull on ADTN, I would wait until after its report and look for long-biased trades if the stock holds above those previous support levels at around $27 to $27.64 a share. If those levels aren’t breached, then look for high-volume strength in the stock that could lead to a big short-covering bounce post-earnings. Look for upside volume to flow into ADTN that’s near or above its three-month average action of 1.2 million shares. This stock could easily bounce back towards its 200-day moving average of 32.25 a share or possibly higher if the bulls gain full control of this stock post-earnings.

I would avoid ADTN or look for short-biased trades if the stock drops back below those major support levels at $27.64 to $27 a share with high-volume. Target a drop back toward its 52-week low of $25.32 a share and possibly much lower if the bears hammer this stock through those near-term support levels with volume.

Supervalu

One earnings short-squeeze play in the retail grocery complex is retail food store operator Supervalu (SVU), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Supervalu to report revenue of $8.31 billion on earnings of 35 cents per share.

This company’s revenue has trended lower for the past four quarters. Revenue dropped 4% to $8.33 billion last quarter, and it fell 2.6% in prior quarter from the year earlier. During the last quarter, Supervalu’s loss widened to $750 million versus a loss of $202 million a year earlier.

Supervalu is looking to right the ship this quarter and return to profitability. The company reported a profit of $95 million in the fourth quarter of the last fiscal year, $74 million in the first quarter and $60 million in the second quarter before posting its most recent loss.

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The current short interest as a percentage of the float for Supervalu is extremely high at 34.6%. That means that out of the 210.34 million shares in the tradable float, 72.69 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.7%, or by 2.6 million shares. This is a huge short-interest, so any bullish earnings news could easily lead to SVU exploding significantly higher post-earnings.

From a technical perspective, SVU is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been stuck in a nasty downtrend since the start of the year, with shares falling from over $8 to its current price of $5.32. That downtrend has pushed the stock into oversold territory since its current RSI reading is 32. Oversold can always get more oversold, but if the stock shows strength post-earning, then it could be ready for a big short-covering bounce.

If you like the look of SVU here, I would consider long-biased trades after its report if this stock manages to break out above some near-term overhead resistance at $5.51 a share with high-volume. Look for volume on that move that registers near or well above its three-month average action of 6.5 million shares. Volume on Monday registered 9.3 million shares traded as the stock closed up 3.7% to $5.32. If we get that high-volume breakout, then look for SVU to make a run at its 50-day moving average of $6.37 a share or possibly much higher.

I would simply avoid SVU or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below Monday’s low of $5.07 with heavy volume. If we get that action, look for SVU to drop 10% or more if the bears hammer this stock down post-earnings.

Rite Aid

Another earnings short-squeeze trade idea is retail drugstore operator Rite Aid (RAD), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Rite Aid to report revenue of $7.03 billion million on a loss of 14 cents per share.

This company has seen its revenue trend higher for two consecutive quarters. During the last quarter, revenue rose 1.8% year-over-year to $6.31 billion. The prior quarter, it also jumped 1.8%. Rite Aid has managed to beat Wall Street estimates for the past three quarters. During the last quarter, the company’s loss came in at 6 cents per share vs. a loss of 9 cents per share from a year earlier.

The current short interest as a percentage of the float for Rite Aid is decent at 6.7%. That means that out of the 652.53 million shares in the tradable float, 43.46 million shares are sold short by the bears. This is more than enough shorts to spark a sizable short-squeeze if Rite Aid can deliver what the bulls are looking for.

From a technical perspective, RAD is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending strong for the past six months, with shares soaring from a low of 98 cents to a recent high of $2.12 a share. Since hitting that high, the stock has pulled back to its current price of $1.69, which is right above its 50-day moving average.

If you’re a bull on RAD, I would wait until after it reports earnings and look for long-biased trades if the stock breaks out above some near-term overhead resistance at $1.82 to $1.89 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 10,626,400 shares. If we get that action, look for RAD to make a run at its previous high of $2.12 a share or possibly much higher.

I would simply avoid long-biased trades in RAD post-earnings if the stock fails to trigger that breakout and then drops back below its 50-day moving average of $1.67 with heavy volume. If we get that action, then this RAD is probably going to fall towards some previous support areas at $1.50 to $1.40 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 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.