Stock Quotes in this Article: ADTN, IRWD, LEN, OZRK, WEN

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.

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Ironwood Pharmaceuticals

My first earnings short-squeeze trade idea is entrepreneurial pharmaceutical company Ironwood Pharmaceuticals (IRWD), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Ironwood Pharmaceuticals to report revenue of $16.85 million on a loss of 49 cents per share.

If you’re looking for a heavily shorted stock that’s uptrending strongly heading into its quarterly report, then make sure to check out shares of Ironwood Pharmaceuticals. During the last month, this stock has soared by 35% and shares are now trading just one point off its 52-week high of $15.92 a share.

The current short interest as a percentage of the float for Ironwood Pharmaceuticals is rather high at 14.3%. That means that out of the 91.96 million shares in the tradable float, 10.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5%, or by about 510,000 shares. If the bears are caught leaning too hard into this quarter, then we could see a large short-squeeze develop post-earnings.

From a technical perspective, IRWD is currently trending above both it 50-day and 200-day moving averages, which is bullish. This stock has been soaring during the last month, with shares moving higher from its low of $10.36 to its recent high of $14.74 a share. During that move, shares of IRWD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed IRWD within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on IRWD, 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 $14.74 to $15 a share and then once it clears its 52-week high of $15.92 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 616,062 shares. If that breakout hits, then IRWD will set up to re-test or possibly take out its next major overhead resistance level at $16.50 a share.

I would simply avoid IRWD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $14 a share with heavy volume. If we get that move, then IRWD will set up to re-test or possibly take out its 200-day moving average of $12.50 a share.

Lennar

Another potential earnings short-squeeze play is homebuilder Lennar (LEN), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.32 billion on earnings of 44 cents per share.

Another heavily-shorted stock that’s been on fire heading into its earnings report is Lennar. This stock has ripped higher by 32% during the last six months and shares are trading just one point off its 52-week high of $42 a share.

The current short interest as a percentage of the float for Lennar is extremely high at 22.7%. That means that out of the 163.92 million shares in the tradable float, 34.92 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares could easily short-squeeze big post-earnings.

From a technical perspective, LEN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strongly for the last six months, with shares moving higher from a low of $28.48 to its recent high of $42 a share. During that uptrend, shares of LEN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed LEN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on LEN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $42 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 4,732,400 shares. If that breakout hits, then LEN will set up re-test to enter new 52-week-high territory, which is bullish price action. Some possible upside targets are $50 to $55 a share.

I would simply avoid LEN 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 at $40 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its 50-day moving average of $38.30 a share.

Adtran

One potential earnings short-squeeze candidate is Adtran (ADTN), which is set to release numbers on Wednesday before the market open. This company designs, manufactures and markets solutions and provides services and support for communications networks. Wall Street analysts, on average, expect Adtran to report revenue of $139.79 million on 6 cent per share.

During the last quarter, this company beat Wall Street estimates after reporting in line results in the prior quarter. In the third quarter, Adtran reported a profit of 17 cents per share, compared with Wall Street estimates of 16 cents per share. Two quarters ago, it reported a net income of 35 cents per share. Heading into this earnings report, net income has dropped 48.2% on average for the last four quarters.

The current short interest as a percentage of the float for Adtran is very high at 18%. That means that out of the 62.34 million shares in the tradable float, 10.47 million shares are sold short by the bears. This is a large short interest on a stock with a reasonably small float. Any bullish earnings news could easily spark a solid short-covering rally post-earnings.

From a technical perspective, ADTN is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strongly for the last three months, with shares soaring from its low of $15.29 to its recent high of $21.22 a share. During that uptrend, shares of ADTN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed ADTN within range of triggering a breakout trade post-earnings.

If you’re bullish on ADTN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $21.22 to $21.30 a share and then above $22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.2 million shares. If that breakout triggers, then ADTN will set up to re-fill some of its previous gap down zone from last July that started at $27 a share.

I would avoid ADTN 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 at $20 a share with high volume. If we get that move, then ADTN will set up to re-test or possibly take out its 50-day moving average of $19.09 a share. Any move below its 50-day will then put $18.77 to $18.36 a share into focus for shares of ADTN.

Bank of the Ozarks

Another earnings short-squeeze play is Bank of the Ozarks (OZRK), which is set to release numbers on Wednesday after the market close. This company provides a range of retail and commercial banking services as well as mortgage lending and corporate cash management services. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $60.97 million on earnings of 55 cents per share.

The current short interest as a percentage of the float for Bank of the Ozarks is rather high at 10.8%. That means that out of the 29.87 million shares in the tradable float, 3.28 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then we could easily see a decent short-covering rally develop post-earnings.

From a technical perspective, OZRK is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $30.76 to its recent high of $34.75 a share. During that uptrend, shares of OZRK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed OZRK within range of triggering a breakout trade post-earnings.

If you’re bullish on OZRK, 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 $34.75 to $34.98 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 137,434 shares. If that breakout triggers, then OZRK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $43 a share.

I would avoid OZRK 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 $33.42 to its 50-day at $32.76 a share with heavy volume. If we get that move, then OZRK will set up to re-test or possibly take out its next major support levels at $32.25 to its 200-day at $31.69 a share.

Wendy’s

My final earnings short-squeeze trade idea is Wendy’s (WEN), which is set to release numbers on Wednesday before the market open. This company operates quick service restaurants specializing in hamburger sandwiches throughout the U.S. Wall Street analysts, on average, expect Wendy’s to report revenue of $637.94 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for Wendy’s sits at 3.6%. That means that out of the 266.11 million shares in the tradable float, 13.21 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 squeeze if Wendy’s can deliver the earnings news the bulls are looking for.

From a technical perspective, WEN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending modestly for the last three months, with shares moving higher from its low of $4.09 to its recent high of $4.87 a share. During that uptrend, shares of WEN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed WEN within range of triggering a breakout trade post-earnings.

If you’re in the bull camp on WEN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $4.87 to $4.95 a share and then above $5.13 to $5.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.9 million shares. If that breakout hits, then WEN will set up to re-test or possibly take out its next major overhead resistance levels at $5.50 to $5.58 a share. Any move above those levels will then put $5.62 into focus for shares of WEN.

I would simply avoid WEN if after its report it fails to trigger that breakout, and then drops back below both its 50-day at $4.63 and its 200-day at $4.57 a share with high volume. If we get that move, then WEN will set up to re-test or possibly take out its next major support levels at $4.28 to $4.10 a share 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.


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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 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.