Stock Quotes in this Article: ACTG, ATHN, CBST, GHL, LTM

WINDERMERE, Fla. (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 timeframe that your profits add up quickly.

>>5 Stocks Poised for Breakouts

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 you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you have done your due diligence, the stock can still get hammered if the street doesn’t like the numbers or guidance.

>>ACTIVE STOCK TRADERS: Check out Stockpickr’s special offer for Real Money, headlined by Jim Cramer, now!

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, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

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

Acacia Research

My first earnings short-squeeze trade idea is patent player Acacia Research (ACTG), which is set to report results on Thursday after the market close. This company, through its operating subsidiaries, acquires, develops, licenses and enforces patented technologies. It generates revenue and related cash flow from the granting of rights for the use of patented technologies. Wall Street analysts, on average, expect Acacia Research to report revenue of $42.24 million on earnings of 24 cents per share.

If you’re looking for an uptrending heavily shorted stock that the bears are pressing their bets with ahead of the quarter, then make sure to check out shares of Acacia Research. This stock hit a near-term low of $32.44 in June and has since then run up to its current price of $39 a share.

The current short interest as a percentage of the float for Acacia Research sits at 5.9%. That means that out of the 45.94 million shares in the tradable float, 2.85 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 12.4%, or by about 312,800 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a big-time short-covering rally kick off post-earnings.

From a technical perspective, ACTG is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock dropped big back in May from a high of $42.42 to a recent low of $32.44 a share. During that slide lower, shares of ACTG have consistently made lower highs and lower lows, which is bearish technical price action. That said, ACTG has started to rebound of late with shares moving back above both its 50-day and 200-day moving averages. That move has pushed ACTG within range of triggering a near-term breakout trade.

If you’re bullish on ACTG, then I would wait until after earnings and look for long-biased trades if this stock can manage to trigger a breakout above some near-term overhead resistance at $40.32 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 374,862 shares. If we get that move, then ACTG will likely re-test and possibly take out its next major overhead resistance level of $42.43 a share. Any high-volume move over $42.43 should give ACTG a great chance of tagging $44.98 a share.

I would simply avoid ACTG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below both its 200-day at $37.71 and its 50-day at $36.49 a share with high-volume. If we get that action, then ACTG will likely trend down towards $35 to $33 a share, or possibly even lower if the bears hammer this stock post-earnings.

As of the most recently reported quarter, ACTG was one of George Soros' top holdings.

Cubist Pharmaceuticals

Another possible earnings short-squeeze trade is biotechnology and drugs player Cubist Pharmaceuticals (CBST), which is set to release its numbers on Thursday after the market close. This company is focused on the research, development and commercialization of therapies to treat serious medical conditions in acutely ill patients who are hospitalized or are being treated in other acute care settings. Wall Street analysts, on average, expect Cubist Pharmaceuticals to report revenue of $225.47 million on earnings of 46 cents per share.

Last week, Jefferies issues some comments on Cubist saying that the market has been pricing in little to no value for its Phase 3 drug candidates. Jefferies also said it views the current valuation for Cubist as attractive, and kept its buy rating on the stock with a $50 price target.

The current short interest as a percentage of the float for Cubist Pharmaceuticals is very high at 15.1%. That means that out of the 63.04 million shares in the tradable float, 9.52 million shares are sold short by the bears. This is the type of short interest that can produce explosive moves higher on a stock if the company can deliver what the bulls are looking for.

>>5 Biotech Stocks Under $10 Set to Soar

From a technical perspective, CBST is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock had been downtrending hard for the last four months, with shares falling from a high of $44.95 to a recent low of $36.73 a share. During that downtrend, shares of CBST have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has started to lift off that low of $36.73 a share and rip back above both its 50-day and 200-day moving averages.

If you’re in the bull camp on CBST, then I would wait until after they report earnings and look for long-biased trades if this stock triggers a near-term breakout trade above some overhead resistance levels at $41.67 to $43 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 810,070 shares. If we get that move, then CBST will have a great chance of re-testing and possibly taking out its next significant overhead resistance levels at $44 to $44.95 a share. A move over $44.95 would be very bullish since it will mean CBST has entered new 52-week-high territory.

I would simply avoid CBST or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below its 50-day at $40.21 and its 200-day at $39.98 a share with heavy volume. If we get that move, then CBST could get sold off by the bears all the way down to its recent low of $36.73 a share, or possibly even lower to $34.50 to $33.43 a share.

Greenhill

One potential earnings short-squeeze trade in the investment services complex is Greenhill (GHL), which is set to release numbers on Wednesday after the market close. This is an independent investment bank focused on providing financial advice on mergers, acquisitions, restructurings, financings and capital raising to corporations, partnerships, institutions and Governments. Wall Street analysts, on average, expect Greenhill to report revenue of $60.21 million on earnings of 28 cents per share.

On Monday, analysts at Susquehanna upgraded this stock from neutral to positive and raised its price target from $33 to $44 per share.

The current short interest as a percentage of the float for Greenhill is extremely high at 18.9%. That means that out of the 26.97 million shares in the tradable float, 5.05 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 24.5%, or by about 991,600 shares. If the bears are caught pressing too hard into this quarter, then we could see a massive short-squeeze develop if Greenhill & Co. can please the bulls with its earnings report.

>>3 Bank Stock Picks for Earnings Season

From a technical perspective, GHL is currently trading above its 50-day moving average and right below its 200-day moving average, which is neutral trendwise. This stock has been downtrending hard for the past four months, with shares falling from a high of $46.17 to a recent low of $31.77 a share. During that slide lower, shares of GHL have consistently made lower highs and lower lows, which is bearish technical price action. That said, this stock has started to uptrend since hitting that low of $31.77, with shares making higher lows and higher highs. That move has now pushed GHL within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on GHL, then I would wait until after they report and look for long-biased trades if this stock can manage to take out its 200-day moving average of $37.95, and then break out above resistance at $39 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 430,949 shares. If we get that action, then GHL will have a great chance of re-testing and possibly taking out its next significant overhead resistance levels at $44 to $46.17 a share.

I would avoid GHL or look for short-biased trades if after earnings it fails to trigger that move above its 200-day, and then drops below some near-term support $36 a share with heavy volume. If we get that action, then GHL will likely re-test and possibly take out its 50-day moving average of $34.55, and some more near-term support levels at $33.61 to $33.29 a share.

Athenahealth

One potential earnings short-squeeze trade in the computer services complex is Athenahealth (ATHN), which is set to release numbers on Thursday after the market close. This company provides ongoing billing, clinical-related, and other related services to medical group practices primarily in the U.S. Wall Street analysts, on average, expect Athenahelath to report revenue of $103.79 million on earnings of 23 cents per share.

This company met Wall Street estimates last quarter after beating estimates in the prior two quarters. During the first quarter, Athenahealth reported a profit of 8 cents per share vs. Wall Street estimates of 8 cents per share. Revenue in the first quarter jumped 38.1% to $96.6 million from $69.9 million. This company is looking to register its fifth straight quarter of double-digit revenue growth. Athenahealth has averaged year-over-year revenue growth of 34.3% over the last four quarters.

The current short interest as a percentage of the float for Athenahealth is extremely high at 22.5%. That means that out of the 35.15 million shares in the tradable float, 7.85 million shares are sold short by the bears. Any solid earnings news out of this company could easily set off a large short-squeeze, since the short interest is so high and the float is very low.

From a technical perspective, ATHN 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 six months, with shares soaring from a low of $55.10 to a recent high of $87.16 a share. During that uptrend, shares of ATHN have been consistently making higher lows and higher highs, which is bullish technical price action. During the past month, shares of ATHN have been trading range bound from $79.50 to $84.58 a share. A move outside of that range post-earnings should setup the next major trend for ATHN.

If you’re in the bull camp on ATHN, then I would look for long-biased trades after earnings if this stock manages to trigger a near-term breakout above overhead resistance at $84.58 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 449,376 shares. If we get that move, then I would add to any long positions once ATHN takes out its 52-week high of $87.16 a share with high volume.

I would simply avoid ATHN or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below its 50-day moving average of $77.53 a share, and then below some more near-term support at $76.19 a share with heavy volume. If we get that action, then ATHN could easily drop towards its next major support zones at $71 to $69.34 a share, or possibly even toward its 200-day moving average of $66.33 a share.

Life Time Fitness

My final earnings short-squeeze play today is sporting activities player Life Time Fitness (LTM), which is set to release numbers on Thursday before the market open. This company operates multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. Wall Street analysts, on average, expect Life Time Fitness to report revenue of $286.68 million on earnings of 72 cents per share.

Last Tuesday, Stifel Nicolaus initiated coverage on Life Time Fitness with a hold rating on the stock. During the last three months, this stock has been trending lower with shares off by around 9%. The current short interest as a percentage of the float for Life Time Fitness is very high at 15.7%. That means that out of the 37.92 million shares in the tradable float, 6.18 million are sold short by the bears.

From a technical perspective, LTM is currently trading right above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been downtrending big-time for the last four months, with LTM plunging from its March high of $52.68 to a low of $40.40 a share. During that downtrend, LTM has been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to rebound strong off that $40.40 low with the stock hitting a recent high of $48.09 a share, and with it current trading at $44 a share.

If you’re bullish on LTM, then I would wait until after they report earnings and look for long-biased trades if this stock clears and maintains a trend back above its 200-day moving average of $45.18 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 493,662 shares. If we get that action, then I would look for LTM to re-test and possibly take out its next major overhead resistance levels at $48.06 to $49.88 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid LTM or look for short-biased trades if this stock fails to move back above its 200-day, and then if it fails to hold above its 50-day moving average of $44 a share. If it breaks below the 50-day before the report, then use $42.95 as the key support zone to trigger short-biased trades. If we get that action, then look for LTM to take out its next major support zones at $40.40 to $39.04 a share once the bears smash this stock lower post-earnings.

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.

RELATED LINKS:

>>5 Stocks Poised to Pop on Bullish Earnings
>>5 Rocket Stocks to Buy After Friday's Bounce

>>5 Bargain Stocks With High Free Cash Flow Yields

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.