Stock Quotes in this Article: CALL, GIII, GPN, LWAY, OXM

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.

>>5 Huge Stocks Ready to Rocket Higher in April

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.

>>5 Stocks Poised for Breakouts

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.

>>4 Reasons Not to Buy Stocks in 2013

MagicJack VocalTec

My first earnings short-squeeze play is telecommunication services provider MagicJack VocalTec (CALL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect MagicJack VocalTec to report revenue of $39.01 million on earnings of 51 cents per share.

During the last quarter, this company reported revenue of $40.8 million and GAAP reported sales were 64% higher than the prior-year quarter’s $24.9 million. Also during the last quarter, non-GAAP EPS was 75 cents per share and GAAP EPS was 77 cents per share, vs. a loss of 4 cents per share for the prior-year quarter.

The current short interest as a percentage of the float for MagicJack VocalTec is extremely high at 51.2%. That means that out of the 10.13 million shares in the tradable float, 4.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.3%, or by about 202,000 shares. If the bears are caught pressing their bets into a strong quarter, then we could easily see a large short-squeeze develop for shares of CALL post-earnings.

From a technical perspective, CALL 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 modestly for the last few weeks, with shares moving higher from its low of $11.92 to its intraday high of $15 a share. During that uptrend, shares of CALL have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CALL within range of triggering a major breakout trade post-earnings.

If you’re bullish on CALL, 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 $15.25 to $15.66 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 450,448 shares. If that breakout hits, then CALL will set up to re-test or possibly take out its next major overhead resistance levels at $18 to $18.55 a share.

I would simply avoid CALL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $13.39 a share and then below some near-term support at $13.26 a share with high volume. If we get that move, then CALL will set up to re-test or possibly take out its next major support levels at $11.92 to $10.90 a share.

G-III Apparel Group

Another potential earnings short-squeeze trade is retail apparel player G-III Apparel Group (GIII), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $360.21 million on earnings of 40 cents per share.

This company has beaten analyst estimates two times during the past four quarters. Just recently, Brean Capital said the cold weather is a positive for G-III Apparel Group when the company reports earnings this week. This is because the firm predicts that material positives for outwear will offset any potential negatives, and the firm expects to see solid guidance. Brean Capital has a buy rating on the stock and a $44 price target.

The current short interest as a percentage of the float for G-III Apparel Group is notable at 9.7%. That means that out of the 12.39 million shares in the tradable float, 1.56 million shares are sold short by the bears. This is a stock with a decent short interest and a very low tradable float. Any bullish earnings news could easily spark a solid short-covering rally for shares of GIII post-earnings.

From a technical perspective, GIII 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 month, with shares moving higher from its low of $31.52 to its intraday high of $40.69 a share. During that uptrend, shares of GIII have been mostly making higher lows and higher highs, which is bullish technical price action.

If you’re in the bull camp on GIII, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 52-week high at $40.69 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 123,833 shares. If that breakout hits, then GII will set up to re-test or possibly take out its next major overhead resistance levels at $45 to $45.38 a share.

I would simply avoid GIII or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below some near-term support at $38 and then below its 50-day at $36.81 a share with high volume. If we get that move, then GII will set up to re-test or possibly take out its next major support levels at $35.67 to $34.86 a share.

Lifeway Foods

Another potential earnings short-squeeze candidate is health food products player Lifeway Foods (LWAY), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Lifeway Foods to report revenue of $19.31 million on earnings of 3 cents per share.

This company has topped Wall Street estimates just two times during the past four quarters. The current short interest as a percentage of the float for Lifeway Foods is pretty high at 13.7%. That means that out of the 4.6 million shares in the tradable float, 631,000 shares are sold short by the bears. This stock has a low tradable float and a decent short interest, so any bullish earnings news could easily set off a short-squeeze post-earnings.

From a technical perspective, LWAY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the four three months, with shares soaring higher from its low of $7.90 to its recent high of $14 a share. During that uptrend, shares of LWAY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LWAY within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on LWAY, 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 $13.96 to $14 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 18,266 shares. If that breakout triggers, then LWAY will set up to enter new 52-week-high territory, which is bullish price action. Some possible upside targets off that breakout are $17 to $18 a share.

I would avoid LWAY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $13.14 to $12.50 a share with high volume. If we get that move, then LWAY will set up to re-test or possibly take out its next major support levels at $12 to its 50-day moving average at $11.69 a share.

Oxford Industries

Another earnings short-squeeze prospect is apparel player Oxford Industries (OXM), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Oxford Industries to report revenue of $228.64 million on earnings of 70 cents per share.

This company has an amazing streak of seven consecutive quarters of topping Wall Street’s bottom-line estimates. The current short interest as a percentage of the float for Oxford Industries is notable at 7.5%. That means that out of the 55.64 million shares in the tradable float, 14.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.4%, or by about 101,000 shares. If the short-sellers are caught pressing their bets into another solid beat, then we could see shares of OXM spike significantly higher post-earnings.

From a technical perspective, OXM is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has sold off hard during the past few weeks, with shares dropping from its high of $56.55 to its recent low of $51.89 a share. Despite that drop, shares of OXM are still trending above both its 50-day at $50.65 and its 200-day at $50.10 a share.

If you’re bullish on OXM, then I would wait until after its report and look for long-biased trades if this stock is trending above its 50-day at $50.65 a share and then once it breaks out above some near-term overhead resistance at $53.14 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 146,757 shares. If that breakout triggers, then OXM will set up to re-test or possibly take out its next major overhead resistance levels at $56 to $56.66 a share. Any high-volume move above $56.66 to $57.79 could then out $59 into range for shares of OXM.

I would avoid OXM or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day at $50.66 and its 200-day at $50.10 with high volume. If we get that move, then OXM will set up to re-test or possibly take out its next major support levels at $47 to $45 a share.

Global Payments

My final earnings short-squeeze trade idea today is electronic payments provider Global Payments (GPN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Global Payments to report revenue of $580.28 million on earnings of 89 cents per share.

During the last quarter, this company reported revenue of $588.6 million and GAAP reported sales were 11% higher than the prior-year quarter’s $530.5 million. This company has beaten Wall Street estimates only two times during the past four quarters.

The current short interest as a percentage of the float for Global Payments sits at 3.5%. That means that out of the 77.91 million shares in the tradable float, 2.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.1%, or by about 391,000 shares. If the bears are caught pressing their bets too aggressively into a strong quarter, then shares of GPN could easily rip higher post-earnings.

From a technical perspective, GPN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending mildly over the last few weeks, with shares moving higher from its low of $46.87 to its intraday high of $49.90 a share. During that uptrend, shares of GPN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GPN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on GPN, 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 $49.90 to $51.24 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 745,612 shares. If that breakout triggers, then GPN will set up to re-test or possibly take out its next major overhead resistance level at $53.83 a share.

I would simply avoid GPN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $49.04 a share and then below some more near-term support at $48 a share with high volume. If we get that move, then GPN will set up to re-test or possibly take out its next major support levels at $46.87 to its 200-day at $44.68 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.

RELATED LINKS:

>>5 Big Stocks to Trade as S&P Tests Record Highs
>>5 Stocks Under $10 Set to Soar

>>4 Hot Stocks to Trade (or Not)

Follow Stockpickr on Twitter and become a fan on Facebook.

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.