Stock Quotes in this Article: AMED, DMND, DOLE, FTK, HEK

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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Flotek Industries

My first earnings short-squeeze play is oil well services and equipment player Flotek Industries (FTK), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Flotek Industries to report revenue of $77.90 million on a loss of 17 cents per share.

If you’re looking for a stock with a decent short interest that’s been uptrending strong heading into its earnings report this week, then make sure to check out shares of Flotek Industries. This stock has been in play with the bulls so far in 2013, with shares up 17.7%.

The current short interest as a percentage of the float for Flotek Industries stands at 9.4%. That means that out of the 40.57 million shares in the tradable float, 4.42 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then shares of FTK could explode higher post-earnings.

From a technical perspective, FTK 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 moving higher from its low of $9.23 to its recent high of $14.90 a share. During that uptrend, shares of FTK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FTK within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on FTK, 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 $14.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 425,821 shares. If that breakout hits, then FTK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $17 to $20 a share.

I would avoid FTK 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 at $13.43 a share with high volume. If we get that move, then FTK will set up to re-test or possibly take out its next major support levels at $12.90 to $12.50 a share. Any move below $12.50 will then put its 200-day moving average at $11.63 into range for shares of FTK.

Diamond Foods

Another potential earnings short-squeeze trade is U.S.-based branded packaged food player Diamond Foods (DMND), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $239.03 million on earnings of 6 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 Diamond Foods. This stock has ripped higher so far in 2013, with shares up a whopping 30%.

The current short interest as a percentage of the float for Diamond Foods is extremely high at 33%. That means that out of the 17.91 million shares in the tradable float, 6.67 million shares are sold short by the bears. This is a low float high short interest situation, so any bullish earnings news could easily spark a monster short-squeeze for shares of DMND.

From a technical perspective, DMND 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 three months, with shares moving higher from its low of $13.35 to its recent high of $17.99 a share. During that uptrend, shares of DMND have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DMND within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on DMND, 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 $17.99 a share, or above today’s intraday high if it’s greater with high volume. Look for volume on that move that registers near or above its three-month average action of 588,972 shares. If that breakout triggers, then HOV will set up to re-test or possibly take out its next major overhead resistance levels at $21.19 to $25 a share.

I would avoid DMND or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average of $17.22 a share with high volume. If we get that move, then DMND will set up to re-test or possibly take out its next major support levels at $16 to its 50-day moving average of $14.82 a share.

Heckmann

One potential earnings short-squeeze candidate is oil well services and equipment player Heckmann (HEK), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Heckmann to report revenue of $107.99 million on a loss of 2 cents per share

During the last quarter, Heckmann reported revenue of $93.1 million and GAAP reported sales were 95% higher than the prior-year quarter’s $47.8 million. During that same quarter, Heckmann reported EPS that was a loss of 6 cents per share and GAAP EPS that was also a loss of 6 cents per share, vs. a loss of 18 cents per share for the prior-year quarter.

The current short interest as a percentage of the float for Heckmann is extremely high at 28.2%. That means that out of the 93.11 million shares in the tradable float, 40.40 million shares are sold short by the bears. If this company can deliver bullish earnings news, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, HEK is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently started to trend back above its 200-day at $3.65 a share and is now quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on HEK, 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 moving average at $3.85 a share and then above more overhead resistance at $3.98 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.30 million shares. If that breakout triggers, then HEK will set up to re-test or possibly take out its next major overhead resistance levels at $4.35 to $4.45 a share. Any move above $4.45 will then put $5 to $5.14 into range for shares of HEK.

Dole Food

Another earnings short-squeeze prospect is producer, marketer and distributor of fresh fruit and vegetables Dole Food (DOLE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Dole Food to report revenue of $1.13 billion on a loss of 2 cents per share.

The current short interest as a percentage of the float for Dole Food is very high at 15.9%. That means that out of the 51.43 million shares in the tradable float, 8.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 23.8%, or by about 1.60 million shares. If the bears are caught pressing their bets too aggressively into this quarter, then we could easily see shares of DOLE skyrocket post-earnings.

From a technical perspective, DOLE 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 month and change, with shares moving between $10.88 on the downside and $12.09 on the upside. A high-volume move above the upper-end of that range could trigger a major breakout trade for shares of DOLE post-earnings.

If you’re bullish on DOLE, 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 $11.81 to $12.09 a share and then above more resistance at $12.72 to $12.87 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.39 million shares. If that breakout triggers, then DOLE will set up to re-test or possibly take out its next major overhead resistance levels at $14 to $14.60 a share.

I would avoid DOLE 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 $10.88 a share with high volume. If we get that move, then DOLE will set up to re-test or possibly take out its next major support levels at $10.06 to $9.55 a share.

Amedisys

My final earnings short-squeeze trade idea today is health care facilities player Amedisys (AMED), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Amedisys to report revenue of $373.13 million on earnings of 22 cents per share.

If you’re looking for a heavily shorted stock that’s been beaten down a bit heading into its earnings report this week, then check out shares of Amedisys. This stock has dropped 22% during the last six months, and shares are only trading about three points off its 52-week low of $9.51 a share.

The current short interest as a percentage of the float for Amedisys is rather high at 12.2%. That means that out of the 30.05 million shares in the tradable float, 3.66 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.3%, or by about 47,000 shares. If the bears are caught pressing their short bets into a bullish quarter, then we could easily see shares of AMED spike sharply higher post-earnings.

From a technical perspective, AMED is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has recently started to trend back above its 50-day moving average at $11.60 a share and is now quickly moving within range of triggering a near-term breakout trade.

If you’re in the bull camp on AMED, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $12.22 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 304,587 shares. If that breakout triggers, then AMED will set up to re-test or possibly take out its next major overhead resistance levels at $13.36 to $13.63 a share. Any move above those levels will then put $14 to $15 into range for shares of AMED.

I would simply avoid AMED 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 $10.75 to $10.72 a share with high volume. If we get that move, then AMED will set up to re-test or possibly take its next major support levels at $10.26 to $9.52 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.