Stock Quotes in this Article: CBST, CREE, ISRG, MCRS, SCSS

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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Cree

My first earnings short-squeeze trade idea is semiconductor materials manufacturer Cree (CREE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue of $331.20 million on earnings of 30 cents per share.

During the last quarter, this company reported a profit of 18 cents per share versus a mean estimate of 18 cents per shares. This comes after two consecutive quarter of beating Wall Street estimates. Cree has averaged year-over-year revenue growth of 23% over the last four quarters.

The current short interest as a percentage of the float for Cree is rather high at 14.6%. That means that out of the 113.65 million shares in the tradable float, 16.66 million shares are sold short by the bears.

From a technical perspective, CREE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a triple top at around $35 a share. Following that top, shares of CREE traded down to its recent low of $31.22 a share. This stock has now started to move back above its 50-day moving average of $32.63 and its quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on CREE, 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 $35.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.5 million shares. If that breakout hits, then CREE will set up to re-test or possibly take out its next major overhead resistance level at $37.30 a share. Any high-volume move above $37.30 will then put $40 to $45 into range for shares of CREE.

I would simply avoid CREE 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 its 50-day of $32.63 and then $31.22 a share with heavy volume. If we get that move, then CREE will set up to re-test or possibly take out its next major support level at its 200-day moving average of $28.55 a share.

Intuitive Surgical

Another potential earnings short-squeeze play is the da Vinci Surgical Systems maker Intuitive Surgical (ISRG), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Intuitive Surgical to report revenue of $584.36 million on earnings of $4.04 per share.

This company has beaten Wall Street estimates the last four quarters in a row and is coming off a quarter in which it smashed estimates by 98 cents, after reporting net income of $4.46 per share versus a mean estimate of $3.48 per share. Intuitive Surgical has averaged year-over-year revenue growth of 25.4% over the last four quarters.

The current short interest as a percentage of the float for Intuitive Surgical stands at 6.8%. That means that out of the 39.35 million shares in the tradable float, 2.68 million shares are sold short by the bears.

From a technical perspective, ISRG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending strong for the last month and change, with shares soaring from its low of $476.25 to its recent high of $517.46 a share. During that move, shares of ISRG have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed ISRG within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on ISRG, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day at $518.13 a share and its 200-day at $524.37 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 402,618 shares. If that breakout triggers, then ISRG will set up to re-test or possibly take out its next major overhead resistance level at $553.96 a share.

I would simply avoid ISRG 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 $485 a share with heavy volume. If we get that move, then ISRG will set up to re-test or possibly take out its next major support level at $476.25 a share.

Cubist Pharmaceuticals

One potential earnings short-squeeze candidate is biotechnology and drugs player Cubist Pharmaceuticals (CBST), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Cubist Pharmaceuticals to report revenue of $246.42 million on earnings of 48 cent per share.

During the last quarter, this company reported a profit of 68 cents per share. This company has beaten Wall Street estimates for the last three quarters in a row. Cubist Pharmaceuticals has averaged year-over-year revenue growth of 27.6% over the last four quarters.

The current short interest as a percentage of the float for Cubist Pharmaceuticals is pretty high at 13.8%. That means that out of the 64.11 million shares in the tradable float, 8.86 million shares are sold short by the bears. Any bullish earnings news could easily spark a monster short-squeeze for shares of CBST post-earnings.

From a technical perspective, CBST is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $38.53 to its recent high of $44.95 a share. During that uptrend, shares of CBST have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed CBST within range of triggering a breakout trade post-earnings.

If you’re bullish on CBST, 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 $44 to $44.95 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 753,197 shares. If that breakout triggers, then CBST will set up to re-test or possibly take out its next major overhead resistance levels at $48.30 to $49.86 a share.

I would avoid CBST 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 $42.80 to $41.35 a share with high volume. If we get that move, the CBST will be trading back below both its 50-day and 200-day moving averages. Some possible downside targets off that move are $39 to $38.53 a share.

Micros Systems

Another potential earnings short-squeeze play is Micros Systems (MCRS), which is set to release numbers on Thursday after the market close. This is a global designer, manufacturer, marketer, and servicer of enterprise information solutions for the global hospitality and retail industries. Wall Street analysts, on average, expect MICROS Systems to report revenue of $320.64 million on earnings of 58 cents per share.

The current short interest as a percentage of the float for MICROS Systems is rather high at 10.1%. That means that out of the 79.75 million shares in the tradable float, 8.05 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.1%, or by about 1.11 million shares. If the shorts are caught leaning too hard into this quarter, then we could easily see a solid short-covering rally develop post-earnings.

From a technical perspective, MCRS is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last month and change, with shares spiking higher from its low of $39.31 to its recent high of $44.67 a share. During that uptrend, shares of MCRS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed MCRS within range of triggering a major breakout trade post-earnings.

If you’re bullish on MCRS, 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 $44.67 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 871,243 shares. If that breakout triggers, then MCRS will set up to re-test or possibly take out its next major overhead resistance levels at $47 to its 200-day at $48.88 a share.

I would avoid MCRS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $42.85 a share with heavy volume. If we get that move, then MCRS will set up to re-test or possibly take out its next major support level at $41.50 a share. Any high-volume move below $41.50 will then put its 52-week low of $39.31 a share into range for shares of MCRS.

Select Comfort

My final earnings short-squeeze trade idea is bed manufacturer and retailer Select Comfort (SCSS), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Select Comfort to report revenue of $230.04 million on earnings of 32 cents per share.

The current short interest as a percentage of the float for Select Comfort is rather high at 9%. That means that out of the 54.01 million shares in the tradable float, 4.86 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a monster short-squeeze for Select Comfort.

From a technical perspective, SCSS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $23.80 to its intraday high of $28.12 a share. During that uptrend, shares of SCSS have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed SCSS within range of triggering a major breakout trade post-earnings.
If you’re in the bull camp on SCSS, 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 $28.57 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 856,910 shares. If that breakout triggers, then SCSS will set up to re-test or possibly take out its next major overhead resistance level that sits just above $31 a share. Any high-volume move above $31 will then give SCSS a chance to re-fill a previous gap that started near $33 a share.

I would avoid SCSS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $27.48 and 50-day at $26.13 a share with heavy volume. If we get that move, then SCSS will set up to re-test or possibly take out its next major support levels at $24.11 to $23.80 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 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.