Stock Quotes in this Article: CRUS, FSLR, NILE, OPEN, RGR

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 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 The Street doesn’t like the numbers or guidance.

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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.

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

My first earnings short-squeeze play is specialty retailer Blue Nile NILE, which is set to release numbers on Thursday after the market close. This company is an online retailer of diamonds and fine jewelry. Wall Street analysts, on average, expect Blue Nile to report revenue of $88.99 million on earnings of 13 cents per share.

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This company topped Wall Street estimates last quarter after missing estimates in the prior two quarters. During the second quarter, Blue Nile reported a profit of 11 cents per share vs. Wall Street estimates of 7 cents per share. In the first quarter, the company missed Wall Street estimates by 5 cents per share. Heading into this report, net income for Blue Nile has dropped 50.6% on average over the last four quarters.

The current short interest as a percentage of the float for Blue Nile is very high at 26.6%. That means that out of the 11.48 million shares in the tradable float, 3.26 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 169,000 shares.

From a technical perspective, NILE is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $36 on the downside and $41.74 on the upside. A move outside of that range post-earnings will likely set up the next major trend for NILE.

If you’re bullish on NILE, then I would wait until after its report and look for long-biased trades once it manages to take out its 50-day at $38.62 a share, and then once it clears some more overhead resistance levels at $41.74 to $45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 251,218 shares. If we get that action, then look for NILE to hit $50 or higher post-earnings.

I would simply avoid NILE or look for short-biased trades if after earnings it fails to trigger to trend back above its 50-day, and then once it drops below some near-term support at $36.70 a share with heavy volume. If we get that move, then NILE will set up to re-test or possibly take out its 200-day moving average of $33.88 a share post-earnings.
First Solar

Another potential earnings short-squeeze trade is First Solar FSLR, which is set to release its numbers on Thursday after the market close. This company manufactures and sells solar modules with an advanced thin-film semiconductor technology, and it designs, constructs, and sells photovoltaic solar power systems. Wall Street analysts, on average, expect First Solar to report revenue of $966.50 million on earnings of $1.04 per share.

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This stock has been uptrending very strong for the last three months, with shares up a whopping 54%. Despite that strength, shares of FSLR are still trading well off its 52-week high of $54.81 a share ahead of its report.

The current short interest as a percentage of the float for First Solar is extremely high at 49.6%. That means that out of the 60.17 million shares in the tradable float, 29.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by about 1.2 million shares. If the bears are caught leaning too hard into this quarter, then we could easily see an explosive short squeeze develop post-earnings.

From a technical perspective, FSLR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending extremely strong for the last three months, with shares rising from a low of $13.81 to its recent high of $26.31 a share. During that uptrend, shares of FSLR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed FSLR within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on FSLR, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some near-term overhead resistance levels at $25.94 to $26.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 7.7 million shares. If we get that move, then FSLR will set up to re-test or possibly take out its next major overhead resistance levels at $29.63 to $32.50 a share.

I would simply avoid FSLR or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below some near-term support at $22.56 a share with high volume. If we get that move, then FSLR will set up to re-test or possibly take out its next major support levels at $19.68 to $18.30 a share.
Sturm Ruger

Another potential earnings short-squeeze trade is Sturm Ruger (RGR), which is set to release numbers on Wednesday after the market close. This company is engaged in the design, manufacture and sale of firearms to domestic customers. Wall Street analysts, on average, expect Sturm Ruger to report revenue of $112.10 million on earnings of 80 cents per share.

The current short interest as a percentage of the float for Sturm Ruger is gigantic at 41.4%. That means that out of the 17.49 million shares in the tradable float, 7.69 million shares are sold short by the bears. This is a stock with a very low float and extremely high short interest. Any bullish earnings news could easily send shares of RGR soaring higher post-earnings.

From a technical perspective, RGR is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last month, with shares moving between $44.06 on the downside and $50 on the upside. A move outside of that trading range post-earnings will likely setup the next major trend for RGR.

If you’re bullish on RGR, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $48.42 to $50 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average volume of 463,141 shares. If RGR triggers that breakout, then this stock will set up to re-test or possibly take out its next major overhead resistance level at $52.03 a share. Any high-volume move above $52.03 will then put $57.53 into focus for RGR.

I would avoid RGR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $44.69 to $44.06 a share with high volume. If we get that action, then RGR will set up to re-test or possibly take out its next major support levels at $42.64 to $42.56 a share post-earnings.
Cirrus Logic

Another earnings short-squeeze trade candidate is semiconductor player Cirrus Logic (CRUS), which is set to release numbers on Wednesday after the market close. This company develops analog and mixed-signal integrated circuits for a range of audio and energy markets. Wall Street analysts, on average, expect Cirrus Logic to report revenue of $181 million on earnings of 71 cents per share.

This company gets about 60% of its revenue from Apple, so it could be on tap for a decent quarter. A Canaccord Genuity analyst recently said that inventory buildup at Cirrus suggests revenue growth in the December quarter will likely be well above the consensus view.

The current short interest as a percentage of the float for Cirrus Logic is rather high at 10.3%. That means that out of the 64.17 million shares in the tradable float, 6.58 million shares are sold short by the bears. If the bulls get the news they’re looking for from CRUS, then we could easily see a sharp short-covering rally develop post-earnings.

From a technical perspective, CRUS is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last month and change, with shares moving between $36.32 on the downside and $41.45 on the upside. A move outside of that trading pattern post-earnings will likely setup the next major trend for CRUS.

If you’re bullish on CRUS, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $40.47 to $41.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.8 million shares. If we get that move, then look for CRUS to re-test or possibly take out its next major overhead resistance levels at $44 to $45.49 a share. Any high-volume move above those levels post-earnings will likely send CRUS to $50 or higher.

I would avoid CRUS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support at $38.75 to $36.32 a share with heavy volume. If we get that action, then CRUS will set up to re-fill its previous gap up zone that started at around $30 a share.
OpenTable

My final earnings short-squeeze trade idea today is OpenTable (OPEN), which is set to release numbers on Thursday after the market close. This company provides solution that forms an online network connecting reservation-taking restaurants and people who dine at those restaurants. Wall Street analysts, on average, expect OpenTable to report revenue of $39.69 million on earnings of 36 cents per share.

This stock has been uptrending pretty strong for the last three months, with shares up sharply by 30%. That move has pushed shares of OpenTable within six points of its 52-week high of $52.64 a share ahead of its earnings report.

The current short interest as a percentage of the float for OpenTable is extremely high at 42.1%. That means that out of the 17.7 million shares in the tradable float, 9.22 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. If the bulls get the news they’re looking for from OPEN, then we could easily see the stock skyrocket higher post-earnings.

From a technical perspective, OPEN is currently trading 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 soaring from a low of $39.94 to its recent high of $47.23 a share. During that uptrend, shares of OPEN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed OPEN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on OPEN, 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 at $47.23 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 728,020 shares. If we get that move, then OPEN will set up to re-test or possibly take out its next major overhead resistance levels at $50.29 to $53 a share post-earnings.

I would simply avoid OPEN or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day at $44.78 a share with high volume. If we get that move, then OPEN will set up to re-test or possibly take out its 200-day at $42.79 a share. Any high-volume move below its 200-day will then put $39.94 into focus for OPEN.

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.