Stock Quotes in this Article: DMND, LULU, ULTA, BNNY, FIVE

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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Diamond Foods

My first earnings short-squeeze trade idea is packaged food player Diamond Foods (DMND), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $175.78 million on a loss of 17 cents per share.

The current short interest as a percentage of the float for Diamond Foods is extremely high at 32.9%. That means that out of the 18.11 million shares in the tradable float, 6.72 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then DMND could explode higher post-earnings as the bears rush to cover some of their bets.

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From a technical perspective, DMND is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently bounced strongly right off its 50-day at $15.48 a share, and it has now taken out its 200-day at $16.30 a share. That move is quickly pushing shares of DMND within range of triggering a major breakout trade.

If you're bullish 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 levels at $17.47 to $17.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 326,470 shares. If that breakout triggers, then DMND will set up to re-test or possibly take out its next major overhead resistance levels at $21 to $25 a share.

I would simply 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 at $16.30 and its 50-day at $15.48 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 $14.28 to $13.50 a share.

Annie's

Another potential earnings short-squeeze play is natural and organic food player Annie's (BNNY), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Annie's to report revenue of $50.73 million on earnings of 28 cents per share.

The current short interest as a percentage of the float for Annie's is extremely high at 20.2%. That means that out of the 14.73 million shares in the tradable float, 2.75 million shares are sold short by the bears. This is a large short interest on a stock with a low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of BNNY post-earnings.

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From a technical perspective, BNNY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently spiked higher back above both its 50-day at $38.39 and its 200-day at $39.23 a share. That action is quickly pushing shares of BNNY within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on BNNY, 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 $41.04 to $43.10 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 230,736 shares. If that breakout triggers, then BNNY will set up to re-test or possibly take out its all-time high at $48.87 a share. Any high-volume move above $48.87 will then give BNNY a chance to trend north of $50 a share.

I would simply avoid BNNY or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $39.23 and its 50-day at $38.39 a share with high volume. If we get that move, then BNNY will set up to re-test or possibly take out its next major support levels at $37.40 to $36.26 a share. Any high-volume move below those levels will then put $35 to $34 into range for shares of BNNY.

Lululemon Athletica

One potential earnings short-squeeze candidate is technical athletics and yoga apparel maker Lululemon Athletica (LULU), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $341.07 million on earnings of 30 cents per share.

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The current short interest as a percentage of the float for Lululemon Athletica is extremely high at 23%. That means that out of the 133.75 million shares in the tradable float, 23.41 million shares are sold short by the bears. If the bulls like what they hear, then this stock could easily get squeezed significantly higher post-earnings.

From a technical perspective, LULU 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 and change, with shares soaring higher from its low of $61.60 to its recent high of $82.48 a share. During that uptrend, shares of LULU have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LULU within range of triggering a major breakout trade post-earnings.

If you're bullish on LULU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its previous double top area at $82.47 to $82.48 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.72 million shares. If we get that breakout, then LULU will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $90 to $100 a share.

I would avoid LULU 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 $77.95 to $76.80 a share with high volume. If we get that move, then LULU will set up to re-test or possibly take out its next major support levels at its 50-day at $74.72 to its 200-day at $71.42 a share.

Five Below

Another earnings short-squeeze prospect is specialty retailer for teen and pre-teen customers Five Below (FIVE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Five Below to report revenue of $94.11 million on earnings of 4 cents per share.

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This company has seen sales rise by double digits in every quarter it's reported since it came public on July 19, 2012. During the quarter ended May 4, sales soared 33% to $95.6 million and same-store sales jumped 4.2% vs. the year-ago period. The numbers were pre-announced on May 14.

The current short interest as a percentage of the float for Five Below is pretty high at 13.1%. That means that out of the 32.83 million shares in the tradable float, 3.53 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily send shares of FIVE skyrocketing higher post-earnings.

From a technical perspective, FIVE is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last month, with shares falling from its high of $40.68 to its recent low of $35.99 a share. During that move, shares of FIVE have been consistently making lower highs and lower lows, which is bearish technical price action. That said, this stock has held its 200-day off that recent pullback and it's still trending within range of triggering a near-term breakout trade.

If you're bullish on FIVE, 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 $38.85 to $40.68 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 403,992 shares. If that breakout triggers, then FIVE will set up to re-test or possibly take out its next major overhead resistance level at its all-time high of $43.04 a share. Any high-volume move above that level will then give FIVE a chance to trend north toward $50 a share.

I would avoid FIVE 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 $35.99 to $35.12 a share and then below more key support levels at $34.62 to $33.75 a share with high volume. If we get that move, then FIVE will set up to re-test or possibly take out its next major support levels at $30.82 to $27.73 a share.

Ulta Salon, Cosmetics & Fragrance

My final earnings short-squeeze play is beauty retailer Ulta Salon, Cosmetics & Fragrance (ULTA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Ulta Salon, Cosmetics & Fragrance to report revenue of $576.30 million on earnings of 62 cents per share.

Just this morning, Sterne Agee said shares of ULTA should be bought ahead of its earnings report. The firm expects Ulta's first quarter results to surpass its guidance, and the firm predicts that the company's second quarter guidance will be solid.

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The current short interest as a percentage of the float for Ulta Salon, Cosmetics & Fragrance is pretty high at 9.7%. That means that out of the 50.42 million shares in the tradable float, 5.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17%, or by about 836,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of ULTA could rip significantly higher post-earnings.

From a technical perspective, ULTA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month, with shares dropping lower from its high of $96.30 to its recent low of $85.51 a share. During that move, shares of ULTA have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of UTLA have held that $85.51 low and the stock is now trending within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on ULTA, 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 at $88.35 a share and its 200-day at $92.32 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.41 million shares. If that breakout triggers, then UTLA will set up to re-test or possibly take out its next major overhead resistance levels at $96.30 to $100 a share. Any high-volume move above $100 will then give UTLA a chance to tag $105 a share.

I would simply avoid ULTA 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 $85.51 a share with high volume. If we get that move, then ULTA will set up to re-test or possibly take out its next major support levels at $82.24 to $80 a share. Any high-volume move below $80 will then put $77.50 to $75 a share into range for shares of ULTA.

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.