Stock Quotes in this Article: HOV, JMBA, PETM, QUAD, AEGR

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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Jamba

My first earnings short-squeeze play today is retailer of juices, smoothies and health foods Jamba (JMBA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Jamba to report revenue of $46.03 million on a loss of 11 cents per share.

If you’re looking for a stock with a decent short interest that’s been uptrending strong in front of its earnings report this week, then make sure to check out shares of Jamba. This stock has been on fire so far in 2013, with shares up 23.6%.

The current short interest as a percentage of the float for Jamba is notable at 6.3%. That means that out of the 76.68 million shares in the tradable float, 4.39 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.9%, or by about 668,000 shares. If the sellers are caught leaning too hard into a strong quarter, then shares of JMBA could rip higher post-earnings.

From a technical perspective, JMBA 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 four months, with shares soaring higher from its low of $1.81 to its recent high of $2.90 a share. During that uptrend, shares of JMBA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JMBA within range of triggering a near-term breakout trade.

If you’re bullish on JMBA, 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 $2.82 to $2.94 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 871,238 million shares. If that breakout hits, then JMBA will set up to enter new 52-week high territory above $2.94 a share, which is bullish technical price action. Some possible upside targets off that breakout are $3.50 to $4 a share.

Hovnanian Enterprises

Another potential earnings short-squeeze play is homebuilding stock Hovnanian Enterprises (HOV), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Hovnanian Enterprises to report revenue of $381.11 million on a loss of 10 cents per share.

If you’re looking for a heavily shorted stock that’s been uptrending very strong heading into its earnings report this week, then make sure to take a hard look at shares of Hovnanian Enterprises. This stock has exploded higher during the last six months, with shares up a whopping 86%.

The current short interest as a percentage of the float for Hovnanian Enterprises is extremely high at 27.3%. That means that out of the 113.47 million shares in the tradable float, 30.35 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then this stock could explode higher post-earnings.

From a technical perspective, HOV is currently trending 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 $5.12 on the downside and $6.24 on the upside. A high-volume move above the upper end of that range could trigger a near-term breakout trade for HOV post-earnings.

If you’re in the bull camp on HOV, 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 $6.18 to $6.24 a share and then once it takes out more resistance at $6.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 9.97 million shares. If that breakout triggers, then HOV will set up to re-test or possibly take out its next major overhead resistance levels at $7.43 a share.

I would simply avoid HOV 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 $5.14 to $5.12 a share with high volume. If we get that move, then HOV will set up to re-test or possibly take out its next major support levels at $4.26 to $4 a share.

Aegerion Pharmaceuticals

Another earnings short-squeeze candidate is biotechnology and drugs player Aegerion Pharmaceuticals (AEGR), which is set to release numbers on Wednesday before the market open. There are currently no analysts’ estimates available for Aegerion Pharmaceuticals on the revenue front, but the company is forecasted to post a loss of 63 cents per share.

Aegerion is another heavily shorted stock that’s been uptrending crazy strong heading into its earnings report this week. This stock has exploded higher during the last six months, with shares up 117%.

The current short interest as a percentage of the float for Aegerion Pharmaceuticals is pretty high at 12.1%. That means that out of the 21.29 million shares in the tradable float, 2.73 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.2%, or by about 252,000 shares. If the bears are caught pressing their bets too hard into a bullish quarter, then shares of AEGR could rip significantly higher post-earnings.

From a technical perspective, AEGR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last five months, with shares soaring higher from its low of $13.50 to its intraday high of $31.99 a share. During that uptrend, shares of AEGR have been consistently making higher lows and higher highs, which is bullish technical price action.

If you’re bullish on AEGR, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new 52-week high with heavy upside volume. Look for volume on that move that registers near or above its three-month average action of 477,798 shares. If that breakout hits, then AEGR could possibly trend well north of $35 a share.

I would avoid AEGR 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 $28.11 to $27.51 a share with high volume. If we get that move, then AEGR will set up to re-test or possibly take out its next major support levels at $25.92 to $22 a share.

Quad Graphics

Another earnings short-squeeze prospect is global printing services player Quad Graphics (QUAD), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Quad Graphics to report revenue of $1.13 billion on earnings of 92 cents per share.

The current short interest as a percentage of the float for Quad Graphics is extremely high at 33.7%. That means that out of the 21.73 million shares in the tradable float, 6.70 million shares are sold short by the bears. If Quad Graphics delivers the earnings news the bulls are looking for, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, QUAD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last two months, with shares moving between $19.74 on the downside and $22.32 on the upside. A move above of the upper-end of that range post-earnings could trigger a major breakout trade for QUAD.

If you’re bullish on QUAD, 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 $22.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 169,805 million shares. If that breakout triggers, then QUAD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.

I would avoid QUAD 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 $21.10 to $19.74 a share with high volume. If we get that move, then QUAD will set up to re-test or possibly take out its next major support levels at $19 to $17.69 a share.

PetSmart

My final earnings short-squeeze trade idea is PetSmart (PETM), a provider of product, services and solutions for pets, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect PetSmart to report revenue of $1.89 billion on earnings of $1.21 per share.

The current short interest as a percentage of the float for PetSmart stands at 5.3%. That means that out of the 100.63 million shares in the tradable float, 5.68 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.8%, or by about 773,000 shares. If the bears are caught pressing their bets too aggressively into a bullish quarter, then we could easily see shares of PETM spike sharply higher post-earnings.

From a technical perspective, PETM is currently trending below both its 50-day and 200-day moving averages, which is bearish. That said, shares of PETM have started to bounce off its recent low of $61.58 a share. That bounce has started to push the stock within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on PETM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day at $66.90 a share and its 200-day at $67.27 a share and then once it takes out more resistance at $67.73 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.24 million shares. If that breakout triggers, then PETM will set up to re-test or possibly take out its next major overhead resistance levels at $70.31 to $71.68 a share. Any high-volume move above those levels will then put its 52-week high of $72.75 into range for shares of PETM.

I would simply avoid PETM 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 $64 a share with high volume. If we get that move, then PETM will set up to re-test or possibly take out its recent low of $61.58 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.