Stock Quotes in this Article: KBH, LEN, PERY, SPMD, TIF

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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Perry Ellis

My first earnings short-squeeze play is apparel player Perry Ellis (PERY), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Perry Ellis to report revenue of $258.32 million on earnings of 49 cents per share.

The current short interest as a percentage of the float for Perry Ellis is notable at 7.2%. That means that out of the 14.66 million shares in the tradable float, 874,000 shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of PERY could trend sharply higher post-earnings.

From a technical perspective, PERY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down from $19.50 to around $16 a share with heavy downside volume. Following that gap, shares of PERY have started to rebound and move within range of triggering a near-term breakout trade.

If you’re bullish on PERY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its gap down day high of $17.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 136,180 shares. If that breakout hits, then this stock will set up to re-fill some of its gap down zone that started at around $19.50 a share.

I would avoid PERY 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 $16.20 to $16.02 a share with high volume. If we get that move, then PERY will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets are $14 to $13 a share.

Lennar

Another potential earnings short-squeeze trade is homebuilder and provider of financial services Lennar (LEN), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $897.99 million on earnings of 16 cents per share.

During the last quarter, this company posted revenue of $1.35 billion and GAAP reported sales were 42% higher than the prior-year quarter’s $952.7 million. Also, during the last quarter Lennar’s non-GAAP EPS was 36 cents per share and GAAP EPS was 50 cents per share, which was 250% higher than the prior-year quarter’s 16 cents per share.

The current short interest as a percentage of the float for Lennar is very high at 19.4%. That means that out of the 164.99 million shares in the tradable float, 30.07 million shares are sold short by the bears. If Lennar can report solid earnings and deliver the forward guidance that the bulls are looking for, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, LEN is currently trending above both its 50-day and 200-day moving averages, which I bullish. This stock has been uptrending for the last month, with shares moving higher from its low of $36.61 to its intraday high of $42.20 a share. During that uptrend, shares of LEN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of 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 some near-term overhead resistance at $43.18 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.01 million shares. If that breakout triggers, then LEN will set up to enter new 52-week-high territory above $43.22 a share, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would avoid LEN 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 $40.68 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its next major support levels at $38 to $36.61 a share, or even its 200-day moving average of $35.44 a share.

KB Home

One potential earnings short-squeeze candidate is builder of single-family residential homes, townhomes and condominiums KB Home (KBH), which is set to release numbers Friday before the market open. Wall Street analysts, on average, expect KB Home to report revenue of $359.80 million on a loss of 22 cents per share.

If you’re looking for a heavily-shorted stock that’s uptrending very strong heading into its earnings report this week, then make sure to check out shares of KB Home. This stock has been on fire in 2013, with shares up 34% and it’s currently hitting new 52-week highs as I write this.

The current short interest as a percentage of the float for KB Home is extremely high at 24.8%. That means that out of the 65.84 million shares in the tradable float, 17.89 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then we could easily see a giant short-squeeze kickoff post-earnings.

From a technical perspective, KBH 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 five months, with shares exploding higher from its low of $13.07 to its intraday high of $21.45 a share. During that uptrend, shares of KBH have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KBH within range of triggering a major breakout trade post-earnings.

If you’re bullish on KBH, then I would wait until after its report and look for long-biased trades if this stock manages to print a new 52-week high above $21.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.75 million shares. If we get that move, then KBH will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $25 to $30 a share.

I would avoid KBH or look for short-biased trades if after earnings it fails to hit a new 52-week high, and then drops back below some key near-term support levels at $20 a share to its 50-day moving average at $18.51 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support levels at $17.31 to $15.75 a share.

SuperMedia

Another earnings short-squeeze prospect is yellow pages directory publisher in the U.S. SuperMedia (SPMD), which is set to release numbers on Thursday before the market open. There are currently no Wall Street estimates available for SuperMedia.

If you’re looking for a heavily-shorted stock that’s uptrending solidly heading into its earnings report this week, then make sure to check out shares of SuperMedia. This stock has been on fire in 2013, with shares up 47% and it’s currently trading just 40 cents off its 52-week high of $5.63 a share.

The current short interest as a percentage of the float for SuperMedia is rather high at 12.7%. That means that out of the 7.78 million shares in the tradable float, 1.90 million shares are sold short by the bears. This is a stock with a very high short interest and an extremely low tradable float. Any bullish earnings news could spark a large short-squeeze for shares of SPMD post-earnings.

From a technical perspective, SPMD 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 $3.36 to its recent high of $5.63 a share. During that uptrend, shares of SPMD have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SPMD within range of triggering a near-term breakout trade.

If you’re bullish on SPMD, 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 $5.63 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 87,022 shares. If that breakout triggers, then SPMD will set up to re-test or possibly take out its next major overhead resistance levels at $7.35 to $8 a share.

Tiffany

My final earnings short-squeeze trade idea is jeweler and specialty retailer Tiffany (TIF) which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Tiffany to report revenue of $1.25 billion on earnings of $1.36 per share.

The current short interest as a percentage of the float for Tiffany & Company is pretty high at 9.5%. That means that out of the 122.63 million shares in the tradable float, 11.90 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.5%, or by around 286,000 shares. If the shorts are caught pressing their bets too aggressively into a strong quarter, then we could easily see shares of TIF spike sharply higher post-earnings.

From a technical perspective, TIF 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 $55.57 to its recent high of $70.75 a share. During that uptrend, shares of TIF have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TIF within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on TIF, 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 $70.75 to $72.66 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.40 million shares. If that breakout triggers, then TIF will set up to re-test or possibly take out its next major overhead resistance levels at $78.62 to $81.70 a share.

I would avoid TIF 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 $66 a share to its 50-day moving average at $64.90 a share with high volume. If we get that move, then TIF will set up to re-test or possibly take out its next major support levels at $62 to $61.14 a share, or even its 200-day moving average of $59.84 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.