Stock Quotes in this Article: CYCC, LNN, SNX, VRNT, MFRM

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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Mattress Firm

My first earnings short-squeeze play is specialty retailer of mattresses Mattress Firm (MFRM), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Mattress Firm to report revenue of $261.54 million on earnings of 32 cents per share.

The current short interest as a percentage of the float for Mattress Firm is extremely high at 21.1%. That means that out of the 11.32 million shares in the tradable float, 2.79 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 about 68,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of MFRM could explode higher post-earnings.

From a technical perspective, MFRM 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 month, with shares moving higher from its low of $26.15 to its intraday high of $32. During that move, shares of MFRM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MFRM within range of triggering a near-term breakout trade.

If you’re bullish on MRFM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some past overhead resistance levels at $33.80 to $33.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 249,446 shares. If that breakout hits, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $38 to $40 a share.

I would avoid MFRM 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 at $28.72 and its 50-day moving average at $28.12 with high volume. If we get that move, then MFRM will set up to re-test or possibly take out its next major support levels at $26.15 to $25 a share.

Lindsay

Another potential earnings short-squeeze trade is Lindsay (LNN), a provider of water management and road infrastructure products and services, which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lindsay to report revenue of $163.26 million on earnings of $1.30 per share.

The current short interest as a percentage of the float for Lindsay is very high at 18.1%. That means that out of the 12.55 million shares in the tradable float, 2.27 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 20.9%, or by about 392,000 shares. If the bears are caught being too aggressive into a bullish quarter, then shares of LNN could see a decent short-squeeze post-earnings.

From a technical perspective, LNN 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 $80.98 to its recent high of $94.20 a share. During that uptrend, shares of LNN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LNN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on LNN, 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 $94.20 to $94.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 207,157 shares. If that breakout triggers, then LNN will set up to enter new 52-week-high territory above $94.90 a share, which is bullish technical price action. Some possible upside targets off that breakout are $100 to $110 a share.

I would avoid LNN 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 $89.96 a share with heavy volume. If we get that move, then LNN will set up to re-test or possibly take out its next major support levels at $85 to $82.50 a share.

Cyclacel Pharmaceuticals

Another potential earnings short-squeeze candidate is biotechnology and drugs player Cyclacel Pharmaceuticals (CYCC), which is set to release numbers Wednesday after the market close. There are currently no Wall Street estimates available for Cyclacel Pharmaceuticals.

The current short interest as a percentage of the float for Cyclacel Pharmaceuticals is pretty high at 12.9%. That means that out of the 7.70 million shares in the tradable float, 1.13 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 solid short-squeeze develop for shares of CYCC post-earnings.

From a technical perspective, CYCC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock been trending sideways for the last four months, with shares moving between $6.50 on the upside and $5.01 on the downside. A high-volume move above the upper-end of its recent range could trigger a near-term breakout trade for shares of CYCC post-earnings.

If you’re bullish on CYCC, 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 $5.88 to $6.05 a share and then once it takes out more resistance at $6.35 to $6.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 158,282 shares. If that breakout triggers, then CYCC will set up to re-test or possibly take out its next major overhead resistance levels at $7.25 to $8 a share.

I would avoid CYCC 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 $5.52 a share and then once it breaks below more support at $5.34 to $5.30 a share with high volume. If we get that move, then CYCC will set up to re-test or possibly take out its next major support levels at $5.01 to its 200-day moving average at $4.88 a share.

Synnex

Another earnings short-squeeze prospect is business process services player Synnex (SNX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Synnex to report revenue of $2.44 billion on earnings of 88 cents per share.

The current short interest as a percentage of the float for Synnex is rather high at 14.2%. That means that out of the 26.36 million shares in the tradable float, 3.76 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7%, or by about 245,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of SNX could easily rip higher post-earnings.

From a technical perspective, SNX 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 soaring higher from its low of $30.70 to its intraday high of $40.67 a share. During that uptrend, shares of SNX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SNX within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on SNX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its intraday high of $40.67 a share or its intraday high (if greater) on Wednesday with high volume. Look for volume on that move that hits near or above its three-month average action of 167,275 shares. If that breakout triggers, then SNX will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $44.25 a share. Any high-volume move above $44.25 will then put $50 into range for shares of SNX.

I would avoid SNX 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 $39 a share with high volume. If we get that move, then SNX will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $37.70 to $37.56 a share. If those levels get taken out with volume, then SNX could re-test or take out its 200-day moving average at $34.59 a share.

Verint Systems

My final earnings short-squeeze trade idea is Verint Systems (VRNT), a provider of actionable intelligence solutions and services for enterprise workforce optimization and security intelligence, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Verint Systems to report revenue of $226.28 million on earnings of 75 cents per share.

The current short interest as a percentage of the float for Verint Systems sits at 3.6%. That means that out of the 23.58 million shares in the tradable float, 1.29 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.7%, or by about 57,000 shares. If the shorts are caught pressing their bets too aggressively into a strong quarter, then we could easily see VRNT spike sharply higher post-earnings.

From a technical perspective, VRNT 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 $33.63 on the downside and $35.89 on the upside. A high-volume move above the upper end of its recent sideways chart pattern could easily trigger a near-term breakout trade for shares of VRNT post-earnings.

If you’re in the bull camp on VRNT, 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 $35 to $35.89 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 379,821 shares. If that breakout triggers, then VRNT will set up to enter new 52-week high territory above $35.89, which is bullish technical price action. Some possible upside targets off that breakout are $38 to above $40 a share.

I would avoid VRNT 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 $34.45 a share and then below more support at $33.63 to $33.21 a share with high volume. If we get that move, then VRNT will set up to re-fill some of its previous gap up zone from January that started at around $31 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.