Stock Quotes in this Article: AVAV, BKS, SNX, SONC, SWHC

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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AeroVironment

My first earnings short-squeeze trade idea is unmanned aircraft maker AeroVironment (AVAV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect AeroVironment to report revenue of $51.07 million on a loss of 10 cents per share.

The current short interest as a percentage of the float for AeroVironment is pretty high at 9.9%. That means that out of the 18.73 million shares in the tradable float, 1.89 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of AVAV could trend notably higher post-earnings.

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From a technical perspective, AVAV 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 falling from its high of $21.37 to its recent low of $19.25 a share. During that move, shares of AVAV have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're bullish on AVAV, 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 $20 to $21.37 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 219,112 shares. If that breakout hits, then AVAV will set up to re-test or possibly take out its next major overhead resistance levels at $23.18 to $23.70, or even $25 a share.

I would simply avoid AVAV 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 $19.25 to $19 a share with high volume. If we get that move, then AVAV will set up to re-test or possibly take out its next major support levels at $17.82 to $17.69 a share. Any high-volume move below those levels will then set up AVAV to re-test or possibly take out its 52-week low at $16.98 a share.

Barnes & Noble

Another potential earnings short-squeeze play is book and magazine retailer Barnes & Noble (BKS), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Barnes & Noble to report revenue of $1.33 billion on a loss of 99 cents per share.

The current short interest as a percentage of the float for Barnes & Noble is extremely high at 20.9%. That means that out of the 36.43 million shares in the tradable float, 7.39 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low float. Any bullish earnings news could easily send shares of BKS soaring higher post-earnings.

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From a technical perspective, BKS 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 few weeks, with shares moving lower from its high of $23.59 to its recent low of $18.31 a share. During that move, shares of BKS have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on BKS, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day at $19.88 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.41 million shares. If that breakout hits, then BKS will set up to re-test or possibly take out its next major overhead resistance levels at $23.59 to its 52-week high at $23.71 a share.

I would simply avoid BKS 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 $18.31 to $17.49 a share with high volume. If we get that move, then BKS will set up to re-test or possibly take out its next major support levels at $16.44 to $15.76 a share. Any high-volume move below those levels will then put $15 to $14 within range for shares of BKS.

Sonic

One potential earnings short-squeeze candidate is drive-in restaurant operator Sonic (SONC), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Sonic to report revenue of $147.54 million on earnings of 26 cents per share.

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The current short interest as a percentage of the float for Sonic stands at 5.8%. That means that out of the 52.48 million shares in the tradable float, 3.02 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. If the bulls get the earnings news they're looking for, then this stock could easily rip higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, SONC 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 six months, with shares soaring higher from its low of $9.87 to its recent high of $15.20 a share. During that uptrend, shares of SONC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SONC within range of triggering a major breakout trade.

If you're bullish on SONC, 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 $14.75 to its 52-week high at $15.20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 591,208 shares. If we get that breakout, then SONC will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $20 to $22 a share.

I would avoid SONC 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 $13.33 a share with high volume. If we get that move, then SONC will set up to re-test or possibly take out its next major support levels at $12.30 to $11.25 a share.

Smith & Wesson

Another earnings short-squeeze prospect is manufacturer of firearms Smith & Wesson (SWHC), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Smith & Wesson to report revenue of $170.72 million on earnings of 44 cents per share.

Just last week, this company issued some preliminary information about its coming quarter. The company said net sales jumped 38% for the quarter on a 63% jump in net income. Smith & Wesson also announced a large share buyback plan of $100 million in stock.

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The current short interest as a percentage of the float for Smith & Wesson is extremely high at 17.7%. That means that out of the 62.78 million shares in the tradable float, 11.09 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a large short-squeeze for shares of SWHC post-earnings.

From a technical perspective, SWHC 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 soaring higher from its low of $8.25 to its recent high of $10.03 a share. During that uptrend, shares of SWHC have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SWHC within range of triggering a major breakout trade post-earnings.

If you're bullish on SWHC, 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 $10.03 to $10.63 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.64 million shares. If that breakout hits, then SWHC will set up to re-test or possibly take out its 52-week high at $11.25 a share. Any high-volume move above $11.25 will then give SWHC a chance to trend north of $12 a share.

I would avoid SWHC 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 $9.05 a share with high volume. If we get that move, then SWHC will set up to re-test or possibly take out its next major support levels at $8.50 to $8.25 a share. Any high-volume move below those levels will then set up SWHC to trend below $8 a share.

Synnex

My final earnings short-squeeze trade idea is global business services player Synnex (SNX), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect SYNNEX to report revenue of $2.50 billion on earnings of 81 cents per share.

The current short interest as a percentage of the float for SYNNEX is very high at 15.5%. That means that out of the 26.21 million shares in the tradable float, 4.06 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SNX could easily trend significantly higher post-earnings.

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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 very strong for the last two months, with shares soaring higher from its low of $32.04 to its recent high of $44.10 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.

If you're in the bull camp on SNX, 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 $43 to its 52-week high at $44.10 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 202,920 shares. If we get that breakout, then SNX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would avoid SNX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $41 to $40.15 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 $37.87 to its 200-day moving average at $35.73 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.