Stock Quotes in this Article: OPEN, RDN, SFLY, LNKD, FB

MADISON, Wis. (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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LinkedIn

My first earnings short-squeeze play today is Internet professional network player LinkedIn (LNKD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect LinkedIn to report revenue of $317.08 million on earnings of 31 cents per share.

The current short interest as a percentage of the float for LinkedIn is notable at 6.7%. That means that out of the 89.12 million shares in the tradable float, 4.11 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid short-covering rally if LinkedIn can deliver the earnings news the bulls are looking for.

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From a technical perspective, LNKD 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 recent low of $165.01 to its intraday and now all-time high of $193.37 a share. During that uptrend, shares of LNKD have been consistently making higher lows and higher highs, which is bullish technical price action.

If you’re bullish on LNKD, then I would wait until after its report and look for long-biased trades if this stock manages to break out to a new all-time high above $193.37 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.35 million shares. If that breakout triggers, then LNKD will set up to enter new all-time territory, which is bullish technical price action. Some possible upside targets off that move are $210 to $220 a share, or possibly even $230 a share.

I would simply avoid LNKD 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 $185 to $180 a share with high volume. If we get that move, then LNKD will set up to re-test or possibly take out its 50-day moving average at $175.01 a share.

Facebook

Another potential earnings short-squeeze play is online social networking leader Facebook (FB), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Facebook to report revenue of $1.44 billion on earnings of 13 cents per share.

The current short interest as a percentage of the float for Facebook sits at 7.5%. That means that out of the 1.44 billion shares in the tradable float, 35.34 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to send shares of Facebook surging higher post-earnings if the company can deliver bullish earnings news.

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From a technical perspective, FB is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending modestly for the last few weeks, with shares moving higher from its low of $25.15 to its recent high of $27.62 a share. During that uptrend, shares of FB have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FB within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on FB, 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 $27.62 to $28.10 a share and then once it clears more resistance at $28.67 to $29.08 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 42.98 million shares. If that breakout hits, then FB will set up to re-test or possibly take out its next major overhead resistance levels at $32.50 to $33.45 a share.

I would simply avoid FB or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $26.83 a share with high volume. If we get that move, then FB will set up to re-test or possibly take out its 200-day at $24.94 a share post-earnings.

Shutterfly

One potential earnings short-squeeze candidate is Internet-based social expression and personal publishing service provider Shutterfly (SFLY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Shutterfly to report revenue of $109.74 million on a loss of 40 cents per share.

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The current short interest as a percentage of the float for Shutterfly is pretty high at 15.9%. That means that out of the 28.41 million shares in the tradable float, 5.83 million shares are sold short by the bears. This is high short interest on a stock with a relatively low float. Any bullish earnings news could easily send shares of SFLY soaring post-earnings.

From a technical perspective, SFLY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last two months, with shares moving between $41.72 on the downside and $46.12 on the upside. A high-volume move above the upper-end of its recent range could trigger a major breakout trade for shares of SFLY post-earnings.

If you’re bullish on SFLY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $46.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 869,553 shares. If we get that breakout, then SFLY will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share.

I would avoid SFLY or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $43.63 a share and then below some more key near-term support levels at $42.95 to $41.72 a share with high volume. If we get that move, then SFLY will set up to re-test or possibly take out its next major support levels at $40.69 to $38 a share. Any high-volume move below $38 will then give SFLY a chance to re-fill some of its previous gap zone from February that started at $32 a share.

Radian Group

Another earnings short-squeeze prospect is mortgage insurance and financial guaranty player Radian Group (RDN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Radian Group to report revenue of $200.72 million on a loss of 2 cents per share.

The current short interest as a percentage of the float for Radian Group is extremely high at 26.8%. That means that out of the 125.20 million shares in the tradable float, 45.96 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.1%, or by about 2.62 million shares. If the bears are caught pressing their bets too aggressively into a strong quarter, then shares of RDN could skyrocket higher post-earnings.

From a technical perspective, RDN 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 few weeks, with shares moving higher from its low or $9.84 to its recent high of $12.24 a share. During that uptrend, shares of RDN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RDN within range of triggering a major breakout trade post-earnings.

If you’re bullish on RDN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $12.24 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 10.59 million shares. If that breakout triggers, then RDN will set up to enter new 52-week high territory above, which is bullish technical price action. Some possible upside targets off that breakout are $15 to $17 a share.

I would avoid RDN 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 $11 a share with high volume. If we get that move, then RDN will set up to re-test or possibly take out its next major support level at its 50-day moving average of $10.09 a share to $9.84 to $9.62 a share.

OpenTable

My final earnings short-squeeze play is restaurant reservation Website player OpenTable (OPEN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect OpenTable to report revenue of $45.58 million on earnings of 43 cents per share.

Just recently, JPMorgan downgraded shares of OpenTable to neutral from overweight. The firm said that first quarter results will be in line with expectations, and thus that the stock is fully valued.

The current short interest as a percentage of the float for OpenTable is extremely high at 21%. That means that out of the 22.42 million shares in the tradable float, 4.71 million shares are sold short by the bears. This is a stock with a high short interest and low float. Any bullish earnings news could easily set off a large short-squeeze for shares of OPEN post-earnings.

From a technical perspective, OPEN is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom at $54.40 to $54.38 a share, and now the stock is quickly moving within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on OPEN, 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 $57.69 a share and then once it clears its 50-day at $59.06 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 706,784 shares. If that breakout triggers, then OPEN will set up to re-test or possibly take out its next major overhead resistance levels at $62 to $65 a share.

I would simply avoid OPEN 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 $54.40 to $54.38 a share with high volume. If we get that move, then OPEN will set up to re-test or possibly take out its next major support levels at $49 to $48 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 Madison, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, Wis., 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.